The rising trend of renting out part of your home as an investment

I recently wrote about the concept of being a ‘renter-investor’, where I reviewed some of the positives and negatives associated with it: 

The more research I conduct, the more I see this trend emerging as an increasingly popular investment strategy. But what of those who go half-way there, as in: owning and occupying their principal place of residence (PPOR) and then renting one or even two of the bedrooms in that dwelling? 

It is certainly a trend that is picking up steam. In fact, a recent poll conducted by PRDnationwide concluded that 14% of respondents already had at least one person renting a room in their PPOR, with one in three home owners considering the idea of renting a room out as a revenue driver.

In fact, a simple Australia-wide search on Gumtree.com.au today reveals over 10,173 listings Australia of users advertising a room to rent in their homes. Sure, a portion of these ads are for those who are renting themselves, and effectively sub-letting. 

I guess what I’m getting to is this: I am currently (and have been for almost two years) a renter-investor, finding the strategy suitable to my lifestyle as well as to my balance sheets in my holding cost analysis Excel spreadsheets. But, having exchanged contracts two weeks ago on a PPOR for myself (yes, I’ve decided I need a permanent place to hang my hat), I am actually less than four weeks away from settlement, and my mind is ticking over to the possibility of renting the second bedroom of this residence. 

But with this notion comes so many additional questions. What of the tax issues apparent with this arrangement? And what of the practicalities? What are your rights (and the rights of your tenant) in a circumstance where you let a room, with no formal lease for which the tenant is to comply to?

I do not have all the answers, but I am keen to raise the questions and get the feedback of the investment community.

1)      Tax issues This is something I’m not sure of. In theory, any income you are earning from a property must be declared to the ATO. But what effect does this have on the “tax-free haven” nature of your principal place of residence? There are those who have suggested that by wording the tenant not as a “tenant”, but as a “lodger” or “boarder” this creates a grey area in which the “intended use” of the property is unclear, however I am not certain this is the best way to play it. I’ve had people I know recommend to pocket the weekly board/rent in cash and not declare it, and because the tenant is not on a formal lease, a formal “investment property revenue” should not be declared to the ATO. I’m keen to hear from the community their thoughts on such a notion. 

2)      Practicalities This is an area in which I bring much more experience. Having house/flat shared for the better part of the last 10 years, both in larger four-person plus share houses, down to two-bedroom apartments with just one flatmate, I can attest to the importance of good tenant selection. You need to consider the practicalities of the space that you will inhabit with one (or more, if relevant) flatmates. Small apartments can be tricky, and you may feel you are living on top of one another. Personality clashes are common, and can help be avoided by proper screening of your flatmate. Remember the gruelling process you have to go through to successfully ‘win’ a rental housing application? Well, agencies do this to ensure they are accepting only the best, most trustworthy future tenants, into a property. You should demand the same from your applicants. Sit them down after an inspection of the room for a more formal interview. Ensure you ask all the right questions (Google this for suggestions; there are many you can ask). 

3)      Tenant (and your!) rights I must be honest; over the years I’ve been lucky with flatmates. Usually they are ‘friends of friends’ (coming with references and trust), or even better, friends of my own. But when interviewing complete strangers, establish a “way we live together” list before they move in. Also, it is your place and you could ask for a bond/deposit. Legally you’d be best to lodge this with the Department of Fair Trading, but this is your call. Make clear the rules of the house, expectations, and especially duration of stay. This will ease any potential clashes or misunderstandings further down the track. 

4)      Industrialisation of the flatmate ‘industry’. The advent of sites like Flatmate Finder is an indication that house/flat sharing is an increasingly popular trend. In fact, niche audiences within this category are now being catered to, thanks to specific niche flatmate-finding sites now gaining popularity. There are sites dedicated to mature/older flatmate seekers, gay and lesbian, and even pet-owning/sensitive flatmate seekers!

While renting a room in your own place may not be a strategy that is for all; it’s one to consider, as it may help with the cashflow of whatever your current living arrangement may be. For investors, it is always going to be about that bottom line. And if you can claw back even a few hundred dollars per month by renting a room, imagine what future growth opportunities you could unlock by pouring that money back into an investment stream of your own.

Cameron McEvoy is a property investor and maintains a blog, Property Spectator.