Tell them you are swingers. That you frequently have orgies in the house and do not want a child to interfer with your lifestyle. Also make sure they realize they will have to find other accomodations on the nights you have parties - that is unless they are willing to share themselves. (If you are sure they would not take you up on this, that is)
Also make up a contract. Get it typed up and in detail. They will have to pay rent monthly, use the going rate for 2 bedroom apts since they have a child, also add on a home insurance charge since your insurance will go up (supposedly
), and put in there a detailed list of rules for the renters to abide by including no trespassing on certain areas of the house, no use of the laundry facilities, garage, phone and any other bathroom than those designated and no pets allowed as the addition to those you already have would be too great a load on the house. Also add on a hefty deposit. Make is as painful as possible. Then tell them if they want to move in you are happy to accomodate but that your finances and housing (electric and gas bill included)cannot handle the extra strain that another family would put on it without extra maintanence and repairs. Make sure that they know they will have to pay the first month's rent and deposit up front as they would in any apt. That should be enough to deter them.
Then you aren't telling them no outright but you can make it too painful for them
to do.