Can a tenant run a business from a rental property?

Last updated: December 30, 2024

As a landlord or tenant, understanding the nuances of running a business from a rental property is crucial. Whether you’re an investor managing a portfolio of single-family homes (1-4 units), or a tenant seeking to operate a home-based business, it’s essential to grasp the legal, financial, and practical implications. This article explores whether tenants can run businesses from rental properties, the implications for landlords, and best practices for managing this arrangement.

Do Residential Leases Allow Tenants to Run a Business from the Property?

In most cases, standard residential lease agreements are designed for living purposes, not for operating a business. These leases often include clauses that restrict the property’s use to residential purposes only. However, the specifics depend on the lease agreement, local regulations, and the nature of the business the tenant intends to operate.

Access OfferMarket's standard residential lease which includes best-practices and insights. This standard lease agreement is used by hundreds of rental property investors on the OfferMarket platform.

Allowed Businesses

Some leases may allow small-scale home-based businesses, provided they do not violate zoning laws, disturb neighbors, or alter the residential character of the property. Examples of typically allowed businesses include:

• Freelance or remote work (e.g., graphic design, writing, or programming).
• Online businesses without physical inventory or customer foot traffic.
• Tutoring or consulting services with minimal in-person interactions.

Prohibited Businesses

Many leases explicitly prohibit businesses that:

• Involve significant customer or client visits.
• Create excessive noise, odors, or other disturbances.
• Require structural modifications to the property.
• Violate local zoning laws or homeowners’ association (HOA) rules.
• Pose risks to the property’s safety, such as manufacturing or repair shops.

From a Liability Perspective, Should Landlords Allow Tenants to Run a Business?

Landlords should carefully weigh the risks and benefits of allowing tenants to operate a business. Key liability considerations include:

Potential Risks

1. Increased Wear and Tear: Businesses that involve frequent deliveries, heavy equipment, or customer visits can lead to accelerated wear and tear on the property.
2. Safety Hazards: Certain businesses, such as those involving chemicals or heavy machinery, can create safety risks.
3. Legal Issues: If the tenant’s business violates local zoning laws, the landlord may face fines or other penalties.
4. Insurance Complications: Standard landlord insurance policies may not cover claims related to business activities on the property.

Potential Benefits

1. Stable Tenants: Tenants running home-based businesses may have a stable source of income, reducing the risk of missed rent payments.
2. Higher Rent: In some cases, landlords may be able to charge higher rent for properties that accommodate home-based businesses.

Ultimately, landlords should assess each situation individually and consult legal or insurance professionals as needed.

Do DSCR Loans Allow Tenants to Run a Business from the Rental Property?

The DSCR loan is a popular financing option for investment properties where the loan amount is determined based on the debt service coverage ratio of the rental property -- this is a simple cash flow metric. These loans focus on the property’s income-generating potential rather than the borrower’s personal income.

While DSCR loans are typically used for residential rental properties, allowing a tenant to run a business from the property may impact compliance with loan terms. OfferMarket's core DSCR loan program explicitly prohibits "commercial use" -- the subject property should not be operated as a business location. The tenant can conduct "work from home" or serve clients, but it should not serve as a location where non residential operations occur and employees, clients and vendors should not visit this location.

Key Considerations

1. Primary Use: DSCR loans are often tied to the property’s classification as residential. If a tenant’s business significantly alters this classification, it could violate the loan agreement.
2. Lender Policies: Some lenders explicitly prohibit business use on properties financed with DSCR loans, while others may allow it under certain conditions.
3. Zoning Compliance: Business activities must comply with local zoning laws to avoid jeopardizing the property’s residential status.

Landlords should review their DSCR loan terms and consult with their lender before allowing tenants to operate a business.

Does Landlord Insurance Cover Claims Related to Tenant Businesses?

Standard landlord insurance policies are designed to protect against risks associated with residential rental properties. When tenants run businesses, it can introduce risks that these policies may not cover.

Coverage Gaps

1. Property Damage: Damage caused by business activities may not be covered, especially if it results from prohibited uses or negligence.
2. Liability Claims: If a customer or client is injured on the property, the landlord’s insurance may not cover the claim if it’s related to the tenant’s business.
3. Business Equipment: Landlord insurance does not cover the tenant’s business equipment or inventory.

Solutions

1. Endorsements: Some insurers offer endorsements or riders to cover specific business-related risks.
2. Tenant’s Business Insurance: Requiring tenants to carry business insurance, such as general liability or a business owner’s policy (BOP), can protect both parties.

Landlords should discuss these options with their insurance provider to ensure adequate coverage.

How Can Landlords Protect Themselves?

To mitigate risks associated with tenants running businesses, landlords should adopt the following best practices:

Draft a Clear Lease Agreement

Include specific clauses in the lease agreement to address business activities. Key provisions might include:

• Prohibition or conditional approval of business use.
• Requirements for zoning compliance and permits.
• Limitations on customer visits, deliveries, and noise levels.
• Tenant’s obligation to obtain and maintain business insurance.

Conduct Due Diligence

Before approving a tenant’s business:

• Verify the business’s nature and compliance with local laws.
• Assess the potential impact on the property and neighbors.
• Require documentation, such as a business license or insurance certificate.

Monitor the Property

Regular inspections can help landlords ensure that business activities do not violate the lease or pose risks. Be sure to provide proper notice as required by local landlord-tenant laws.

Consult Professionals

Work with legal, insurance, and financial professionals to:

• Draft enforceable lease terms.
• Ensure compliance with zoning laws and DSCR loan terms.
• Obtain appropriate insurance coverage.

Require Business Insurance

Mandate that tenants carry business liability insurance and provide proof of coverage. This protects both the tenant and landlord from potential claims.

Conclusion

Allowing tenants to run a business from a rental property requires careful consideration of legal, financial, and practical factors. While some home-based businesses may pose minimal risks, others can introduce significant liabilities. Landlords should assess each situation individually, consult professionals, and implement safeguards to protect their investments.

By proactively addressing these issues, landlords can make informed decisions that balance the needs of their tenants with their own financial and legal interests.

---

Protect and grow your rental property portfolio with OfferMarket

OfferMarket is a rental property investing platform. Membership is entirely free and includes access to the following:

🏠 Off market properties
💰 Private lending
☂️ Landlord insurance rate shopping
💡 Community & insights

Our mission is to help you build wealth through real estate. If you are not already a member, we hope you will accept our invitation to join us!