For young people entering the property market on their own, the idea of managing a mortgage and the associated bills that come with owning a house can be quite daunting. In most cases, the property you have just purchased has a spare bedroom (or bedrooms) – so why no rent it out and try to get ahead while also having someone to help split the household bills with?
As logical as this sounds, it is important for new homeowners to consider the pros and cons of renting out spare rooms in their house, as there are often consequences that you may not be aware of. Below are some of the things you should consider if you are thinking about renting out a spare bedroom in your home.
Transfer Duty Concession
In Queensland many first home buyers are eligible for the Transfer Duty Concession, meaning the transfer duty (also knowns as stamp duty) fee associated with your property purchase has been waived. One of the eligibility criteria for the Transfer Duty Concession is that you must be purchasing the property to live in as an owner-occupier. This is where things can get a bit complicated – if you are living in the home as an owner-occupier but are renting out a room, the Australian Tax Office (ATO) may still consider your property as being used as an investment, which means there is a chance that they will request the waived transfer duty fee be paid once this is discovered.
The ATO states that if you rent out all or part of your home, the rent money you receive is generally regarded as assessable income. In summary, this means that when you do your tax return, you must declare all rent money received. Tax is payable for all assessable income, including rent money received. Your employer deducts tax from your income before they pay you, however, tax is not deducted from the rent money being paid to you. This means that once you declare it on your tax return, you may receive a tax bill from the ATO.
The other thing to consider is that if you choose to refinance or sell your home in a few years, you may be required to pay Capital Gains Tax (CGT), because the ATO may consider your property an investment property if you have received income from renting out all or part of it.
Generally, home and contents insurance for owner-occupiers does not cover damage caused by tenants who are subletting a room. It is important to review your insurance policy to ensure you are correctly covered for having a sharehouse. If you are renting out a room through Airbnb or Stayz, there are specific insurance policies called short-term home and contents insurance which covers you for the likely events that happen in these arrangements.
Finding a Tenant
Depending on where your house or apartment is, finding a tenant can often take longer than anticipated. Some of the things you need to ask yourself before you advertise your room for rent are:
- Will you include the cost of bills in the rent?
- Will you consider a tenant who has a pet?
- Will you get the tenant to sign a lease and a “house rules” policy?
- Will you charge a bond, and if so, how much?
It is important to screen any potential housemates properly, including speaking to references and ensuring they are able to make rental payments on time. If you choose not to have a policy for house rules, it is important to discuss what your expectations are in terms of cleanliness, visitors and anything else that is important to you when living with someone else. You need to remember that not everyone lives the same way you do or has the same expectations, which is why you should be upfront from the start to avoid any issues later.
The idea of renting out a room in your property may seem like a good idea, but you need to ensure you have considered everything before committing to having a tenant in your house. For more information about renting out rooms in your house, speak to one of our mortgage brokers at Preston Finance and Insurance.