Renting out rooms owner occupied, unrelated tenant laws

29 Replies

I have some very specific questions about possibly renting out rooms in my house. My partner and I bought a house 5 months ago and would like to earn some extra income to eventually rennovate the entire house. Scenario: Rent 2 bedrooms on main floor to 1-2 people (strangers) who would share a bathroom. Partner and I would live in basement with our own bathroom (non-conforming room). We would all share the kitchen/dining room/living room/W&D. We would probably add an extra fridge in the basement for overflow. We are 2.5 miles from downtown Denver, so good location.

1) How do we get around the no more than 2 unrelated tenants rule in Denver (single family home)? Does this still apply to owner occupied rentals? We are not married. We were thinking about renting to a married couple and getting an "extra person" permit so we would be within the tenant law. Or a couple with 1 car would bring less attention, but would like to stay within the law.

2) Would I find a real estate attorney or CPA to determine tax implications? (depreciation, which one of us reports the income [1 is 15% tax bracket; 1 is 28% as single filers], legality, what would the actual net income be, how much to charge)

3) Can we as owners legally live in a non-conforming room (no egress)? Would our insurance allow us to take this liability?

4) What are the insurance implications--could we legally add renters to our insurance?

Any advice or local suggestions would be appreciated.

I'm going to bring @Drew Fein and @Linda Weygant into this conversation. They may have some good insight for you.

Thanks for the shout out, @Dan Mackin !

@Stephani Meyers , I would be happy to discuss this with you.  Here's a first stab at some of your questions (but feel free to give me a call if you have further questions). 

1) Unfortunately, the occupancy limits do extend to owner occupied properties; therefore, you are already at the limit.  You could probably get a home occupation permit to allow for one additional person.  

2) I am not a tax attorney, so you should defer to @Linda Weygant or your tax professional to determine the tax implications. 

3) No and no. 

4) For insurance, you will probably want to insure as though the property was a rental property, i.e., a homeowner's policy, a landlord's policy, and have renter's insurance for each tenant. But you will want to talk with your insurance agent on how to get maximum coverage. 

I should also mention that we use a different, more complex lease for renting out by the bedroom, which is something to consider before you proceed. 

Thank you for the response. It appears as though the occupancy laws will limit our ability to rent out the 2 bedrooms if there is no legal way around it. I am thinking Airbnb may be the only real option to rent out the 2 bedrooms. Another option I am not sure is legal would be to rent out the backyard/driveway to a tiny house/airstream/RV. 

Airbnb could be an option for leasing short term. However, the short-term rental permits do have very specific restrictions (e.g., you can't rent to more than one party under separate contracts), so make sure you learn those prior to renting. You may also want to talk with @James Carlson regarding Airbnb rentals. 

As far as renting out the backyard to a tiny house, there are restrictions against those as well. You have to have a certain number of square feet per occupant (e.g., for two people it must be 250 square feet), and many tiny homes don't comply with those requirements. There are also limitations on parking RVs and airstreams, though I don't know the specifics on those. 

@Stephanie Myers you could get married. Based on what I have seen with code enforcement, you are much more likely to get busted for an RV in the back, or an AirBnB then for occupancy issues. The real downside of violating the code is if you do end up in court with a dispute with a tenant and you are violating some code that can really make you look bad to the judge.

If I got married, we could only still have only one additional tenant though since the third person wouldn't be related to us right? Well owner occupied airbnb is not illegal, but we would need to add an egress or just rent one room. 

Thanks for the mention, @Drew Fein . It's an interesting question @Stephani Meyers raises. I guess the occupancy limits only apply to long-term tenants? Otherwise you'd run into the same issue if you rented it to two friends through Airbnb. 

If you and your partner live in the basement, you could definitely Airbnb the upstairs. Because you can have only one Airbnb license, you couldn't rent out each room separately. (You can read Denver's STR ordinance here.) But there is plenty of demand for two-bedroom units on Airbnb so you likely wouldn't have a problem getting STR tenants in there. Plus, you could make a lot more on Airbnb than you would if you rented each bedroom individually to a long-term tenant.

If you do that, be sure to get short-term rental insurance, which is different from a homeowner's policy or a rental policy. I'm happy to talk with you, if you decide to go this route.

About the legality and insurance issues with living in a non-conforming basement, that's another issue. 

Updated over 2 years ago

Here is Denver's STR ordinance.

Oh, right, it would be the same problem with the unrelated tenants limit. It seems I continue to go in circles with a legal solution. Due to the fact that there is a shortage of affordable housing in Denver, it seems a bit silly. So it appears the only legal solution would be to get married and have 1 unrelated tenant (or airbnb person) legally. Then, would we be able to get a permit from the city for an additional person, making it legal to have 4 total people (us 2) and then 2 extra people? 

@Stephani Meyers , I'm interested to hear from someone else who might have an idea about whether the occupancy limits apply apply to STRs. Nothing in the short-term rental ordinance prohibits you from renting on Airbnb to two unrelated people. 

This is what I found: How many guests are allowed to stay in an STR?

STR hosts have the ability to set their own guest maximums. However, per the Denver Zoning

Code (DZC), STRs are accessory to primary residential use, meaning the overall character of the

property should remain residential. The DZC also explicitly states that STRs do not include rental

of a dwelling unit for commercial events, such as parties or weddings. Additionally, only one

rental contract may be allowed at a time in any STR. Multiple rental contracts to separate

parties in an STR are prohibited.

@James Carlson and @Stephani Meyers , another attorney and I reviewed the issue of whether or not the occupancy limits applied to STRs, and we don't think that they do. For one, the STR code states that a STR "[s]hall not be subject to a maximum number of guests per night." Also, the occupancy limit section of the zoning code only references rentals on a monthly basis. Of course, I am not completely sure on this, so it would be wise to have someone look into it further.

Thanks for the review, @Drew Fein . It's good to have your insight, and that makes intuitive sense because having people unrelated to you under the same roof is inherent in Airbnb.

Thank you @Drew Fein ! I will need to do some more research on this and about the tax implications. I don't like surprises so would love to find a tax person/attorney that has experience with this. 

What is the worst that would happen if you just rented the rooms the way you want to -despite the Denver Zoning Code?   Is it true that in Denver violators get a warning notice before they get a fine?   And isn't it true that unless there is a complaint, it is most probable that renting rooms any way you want to will never be a problem? 

@Bill S. said it well "

  • "The real downside of violating the code is if you do end up in court with a dispute with a tenant and you are violating some code that can really make you look bad to the judge."

Still, the odds of a legal dispute occurring between you and a tenant are awfully low.  Its cheaper to waive your fee and move on.   Even if you went to court, though you may look worse in court, the fact that your rental is in violation of the Denver Code won't change either the tenant or landlord duties under the law.  With very few exceptions (health & safety related) your tenant owes you the same legal duties whether your rental is code compliant or not. 

Why not check your insurance, rent the spaces the way you want, pay the taxes required, and carry on until and unless the city issues a warning? 

I am with 

NA Davido . Provided you are renting a safe living space—acting in accordance with landlord common decency, not giving them the no-egress room—having others in your dwelling shouldn't raise any flags or cause someone to rat you out. 

@Stephani Meyers For me personally, I like to avoid trying to "get away" with things, not so much because I fear the repercussions, but it sets a bad example for my own future dealings. That's just my 1 1/2 cents there. No matter what solution you come to, I'd go to your neighbors and just smile and say hey and tell them that you will be taking on AirBnB guests. Then give them your card or your phone number and ask them to please call you if they experience any trouble at all. That kind of good faith typically goes a long way.

Do a month to month contract for one person, but have that person bring in his/her friend, provide a safe and healthy environment, and you're golden.

I've been doing this in my owner-occupied house in Denver for almost a year now. It's a 6 bd, 2 bath that's set up like a top/bottom duplex (but not zoned as a duplex). I put locks on each door and rent each room for between $600 and $700/month. Everything has gone really well so far, we all have house dinners and get along well. The neighbors haven't said anything and there is plenty of parking for everyone on the property. I also made sure the rent numbers worked if I had to rent out the whole house, which a I may do at some point in the future. All leases are month to month, making it more management heavy, but that's the trade off for more cash flow. 

@Lia Martinez Are you concerned that the amount of income you are taking in will be a red flag when you do taxes? 

@Lia Martinez . Wow, that's a powerful return on your investment, I'm guessing. Good for you. The month-to-month leases sound like more work ... until you do full-time Airbnb-ing, where you might be cleaning and changing sheets twice a week. Do you mind me asking where your place is located, roughly?

@Stephani Meyers , are you asking about taxes because you wonder if the city would catch on? Or the feds? 

@James Carlson Considering it's zoned SFH, that's a lot of income for what it is by code. I'm guessing feds wouldn't care, but it's a pretty big risk considering zoning laws.

@Stephani Meyers . I hear what you're saying, but my guess is the bigger risk is having a complaint filed by a neighbor. I remember going to meetings of this Short Term Rental Alliance -- who were fighting against the proposed Airbnb law here in Denver -- and a lot of the STR owners had been doing this for year AND paying the city lodger's tax. The city took their money just fine and never asked a word.

With so much development going on right now, the city doesn't have a lot of extra time to actively search for violations. It seems to be a complaint-driven system. Someone else should correct me if I'm wrong. 

@James Carlson  Yes, that's true. I know when we were looking for rentals (private landlords only), they refused to allow us to have roommates due to the unrelated tenants law, as they were unwilling to take on that risk. These were in full out houses with 3 bed/3 baths and ones that were 2 bed/1 bath. I'm guessing they were doing it based on experience or knowing their neighbors may complain. It's very interesting to me that airbnb gets around this legality, or so it appears. I would think that based on the affordable housing crisis, they would allow for more unrelated tenants vs airbnb guests, but perhaps they receive more tax from airbnb. 

@Stephani Meyers . "...but perhaps they receive more tax from Airbnb." So cynical! It's a great point, because as I think was pointed out above, there are unrelated-people occupancy limits for greater 30-day-or-longer rentals, but not for shorter stays. If the occupancy rules are there to "maintain neighborhood character" or whatever the lingo is, then allowing even more unrelated people to come and go seems counter to that. 

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