The Laws of Renting Out Separate Dwellings on Your Property

If you want to create a separate dwelling unit on your property, you might be tempted to avoid red tape and do it illegally. No harm, no foul, right? Maybe not.

Most municipalities set rules about apartments in single-family homes to preserve neighborhood character and to ensure the safety of tenants. If your home is in a neighborhood zoned for single-family dwellings, you may have to obtain a special exception from the local board of appeals. Typically, you must get a permit for the construction, meet building-code requirements for such things as headroom and a separate exit in a basement, have adequate off-street parking, pass inspections, and purchase a residential-housing rental license (for example, $38 in Montgomery County, Md.), which you must renew annually.

The fallout. You might fly under the radar for a time, but neighbors could complain about extra visitors and vehicles, or a tenant might call with a complaint, says Dan McHugh, manager of housing code enforcement for Montgomery County. As in many places, if you get caught renting out an apartment illegally, the county’s inspectors can issue civil citations with penalties -- $500 the first time and more thereafter. After that, the county can order you to cease and desist, and if you don’t, you could be found in contempt of court and incur additional fines or even jail time.

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If you want to evict a tenant who has failed to meet the terms of a lease, a judge could find that the basis for the contract isn’t enforceable because the apartment was illegal. And if you must file an insurance claim for damage to the apartment, your home insurer could refuse the claim, pay it and then cancel your policy, or even charge you retroactively for the difference in your insurance rate (single-family versus multifamily) for the duration of the rental.