Opening your home to lodgers and making a few bucks from those otherwise under-utilised rooms can be a great way to improve your personal cash flow. But there are legal, taxation and personal hurdles involved.
When I moved out of home after high school, I spent a few months living with my brother in a house he shared with four of his air force mates. It was a bit of fun while I got myself sorted. Plus, it was cheap.
There were some downsides to this particular arrangement. For one, there were frequent visitors pouring in and out of the lounge room. A giant plasma screen television played nothing but music videos and the volume would escalate rapidly whenever the house hosted a party.
Mess was also an occasional issue. As was sharing a single internet connection between three computers. But the thing I hated most was the disgusting brown leather couch, which had been white in a former life.
As I got older and began settling into my post-study life, dominated by career and relationships, the number of people I lived with naturally dwindled, until it was just my partner and I.
Several months ago, I was catching up with a friend who’d just lost her job and was starting to worry about money. The job market being the way it is, Sam started to consider some alternative options. One included getting a flat-mate.
Sam owns her apartment and the second bedroom was mostly empty. On a whim, she placed an advertisement online and was inundated with interest. Within a week, a 30-something bloke who works in finance had moved in.
Things were great. He was courteous, friendly and tidy. When the guy wasn’t working, he was out and about socialising so Sam often had the place to herself. And then old mate met a lady.
At first, it wasn’t too much of an issue. Sam would occasionally come home to find them canoodling on the couch, watching a movie based on some Nicholas Sparks novel (the guy who wrote The Notebook, FYI). Then the once or twice a week visits became daily.
This irked Sam, who’d signed on for one flat-mate… not two. In the end, and over a missing packet of Tim Tams of all things, the arrangement fell apart rapidly and with significant drama. My friend is back to living alone but she’s found a job so she’s not too concerned.
If you’re keen to unlock some income potential from your principal place of residence, renting out a room could be the way to go. However for every perk there’s a pitfall to consider.
Pro – the extra cash
In most cities, particularly those where rents are high and vacancies are low, a room in a decent property that’s centrally located could fetch up to $200 a week. That’s not a bad contribution towards a mortgage each month. Plus, your new house buddy can chip in for bills and reduce your overall expenses.
Con – the extra taxation burden
Any money you take in from a boarder could be considered income and you’ll probably have to declare it. Depending on how much you earn at your day job and what you’re raking in for the room, it might push you into a new tax bracket.
Of course, that opens up a whole range of deduction possibilities on a property where there’d otherwise be none. These include a portion of your rates, interest repayments and any expenses relating to the ‘management’ of the room rental.
There’s also a chance you’ll open yourself up to capital gains tax – for the percentage of your home that’s rented out, anyway.
Pro – it’s a bit of extra company
If you live alone or you’re just generally lonely, a friendly face at the breakfast table might be nice. You could wind up with a pleasant or even comforting addition to your space, and perhaps even a mate. I’m still very close to a girl I lived with during my second year of uni.
Con – you might land yourself a crazy
Everyone has heard at least one share house horror story. There’s a very real risk you’ll end up living with someone you don’t get along with, and all the careful vetting in the world might not reveal a person’s true personality.
Pro – it’s your house, your rules
The great thing about inviting someone to rent a room but share your home is that it’s your space and therefore you can call the shots.
Con – you’re obliged to follow proper regulation
Like any rental, you’ve got your own obligations to meet. If you’re taking a bond, most state authorities will require you to lodge it correctly. This will involve an adequately documented condition report before the tenant moves in and when they leave.
It’s probably a good idea to draft a written agreement that dictates how conflicts will be resolved and what happens in the event the relationship sours beyond repair. Most tenancy authorities have template room agreements that act as a form of simplified lease.
As with any decision regarding your investment, it’s essential you seek professional advice – particularly when it comes to the tax and legal implications.
Shannon Molloy is the deputy editor of Australian Property Investor magazine www.apimagazine.com.au