A rental cottage on your own property???

behaviorkeltonNovember 4, 2010

I have, just by chance, looked at two homes for sale.

In both cases, the homes had cute 1,000 sq ft cottages in the back edge of the yard (big yard).

Are there any advantages or disadvantages financially to maintaining a rental on the same lot of your primary residence?

Is it more difficult to "right off" maintenance expenses when the rental is on the same lot as your own house? (or similar issues that make it somewhat different than an rental on a different lot)?

Thanks!

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jane__ny

In my area of NY there are many older homes which have cottages on the property. They were once caretakers cottages or small studios. I have two friends who rent them out to short-term renters. They are illegal because zoning laws do not allow collection of rent. The law does allow a caretaker to live there but not pay rent.

My friends do collect rent which covers the cost of heat and electric. They cannot write off any maintenance as it is not legal to collect rent.

You need to check the zoning laws in your area. This area is 1 acre zoning and these cottages share the 1 acre.

Jane

    Bookmark   November 5, 2010 at 12:23AM
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chisue

This is common in Hawaii. The secondary house is called an "Ohana" -- ohana meaning extended family in Hawaiian. Nowadays people rent them to tourists -- IF they can get a vacation/short term rental license from the county or state. You'd have to have insurance too.

    Bookmark   November 6, 2010 at 1:37PM
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Billl

The biggest difference is probably in building codes. Even if the building is separate, many of the major systems are interconnected - electrical, plumbing etc. If you have to do an upgrade on one of those systems to meet building codes for a rental, it might require comparable upgrades to your primary residence.

    Bookmark   November 8, 2010 at 9:05AM
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terrene

I have an apartment in my primary residence, it is part of the house, not a separate cottage (wish it was separate). I have rented it for nearly 8 years. At first it was "illegal", and then I discovered the town had a special permit for "an additional dwelling unit in a single family home" and I applied for the permit. This required a building inspection as well as Board of Health review, and I had to install a 2nd egress to the exterior, and install smoke and carbon monoxide detectors, to comply with state fire code. But the apartment is now fully legal in every sense.

Even before the apartment became legal, I claimed the income on my taxes (think it's schedule E?) and deducted expenses pertaining to the apartment which is calculated as 20% of the living space of the house. For example, the utilities are included in the rent, but I write off 20% of electric, oil, and water bills. The homeowner's insurance also lists the home as having two kitchens.

If the cottage is legal rental, then that's great, but even if it wasn't that wouldn't stop me from renting it out anyway (discretely) AND filing the income and expenses on your taxes. I would make sure that the cottage is well-maintained - tip top condition - and that it complies with state fire code, to minimize liability. You really don't want to get in trouble with the IRS or get sued.

This situation works out great (most of the time, I did have one whacko tenant). The rental income helps to pay the mortgage. I also own other rental property and have to say that maintaining a rental unit and monitoring a tenant on an owner-occupied property is much easier than maintaining rental property that is at another location.

    Bookmark   November 10, 2010 at 3:45AM
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maifleur01

I would question if your homeowners insurance would provide coverage if as an example something the tenant did caused a problem in the rest of the house such as a fire. Many homeowners insurance will not cover a house with a rental.

    Bookmark   November 10, 2010 at 1:40PM
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colorcrazy

Several people have mentioned that it depends on the zoning laws where you live.

Pros - you are nearby if something goes wrong (leak, stuck door, rotted floor board, tenant gets locked out, broken window).

Con - You will be pestered all hours of day and night for "emergencies" related to the dwelling.

    Bookmark   December 1, 2010 at 10:56PM
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