renting-spare-room (1).jpeg

Renting out a room in your house can seem like a straightforward way to generate a bit of extra income, but it's not without its complexities. If you're a homeowner, there are a number of factors to consider before opening your home to a tenant - from understanding legal obligations to navigating potential tax implications.

In this article, we'll explore the key considerations involved in renting out a room in your home and provide practical tips to help you navigate this process with confidence.

Can I rent out a room in my house?

While most homeowners in Australia can rent out a spare room, there can be exceptions. If you live in a strata-titled property (common in apartments) or a leasehold home, you should double-check your agreements. You may need permission from your building's management committee before renting out your spare bedroom.

Some limitations might also exist. Strata or owner's corporations may restrict advertising on short-term letting websites like Stayz or Airbnb. They could have other rules as well.

Some areas might have zoning or local council regulations that apply. It's a good idea to check with your local council to see if any restrictions affect your plans.

If you're a renter yourself and considering renting out a spare bedroom, things get a little bit trickier. Most rental agreements strictly forbid subletting (renting out part of the property) without written permission from the landlord. This protects the property owner's interests and ensures they're aware of who else is living in their property. Breaching this clause in your lease could lead to eviction. Always talk to your landlord first and get their written consent before advertising a room for rent.

Here are the rules in each state and territory for sub-letting:

How do you rent a room out?

Prepare the room

Just like you'd tidy up before houseguests, presenting your rental room in a good light attracts the best tenants. If you've been using it as a storage room before now, it's time to find a new home for all that junk. Make sure there's enough space for your new tenant and that everything from utilities to appliances is in working order, and you're prepared to share common areas.

Determine a competitive rent

To find the sweet spot for your room's rental price, you should consider a few factors: what similar rentals cost nearby, any special features you offer (like a private bathroom/ensuite or parking), and the overall condition of the room.

Draft a rental agreement

A detailed rental agreement protects the new tenant and yourself as the landlord. It should clearly outline rent amount and due dates, house rules, responsibilities, and the length of the tenancy. The more specific you are, the fewer misunderstandings you'll face down the road.

Advertise your spare bedroom

Spread the word using online rental websites, social media groups, or community bulletin boards. When potential tenants reach out, schedule interviews to get a feel for their personality and lifestyle. Don't be shy about asking questions - it can save you headaches later. For instance, if you (or your strata) don't allow pets, be upfront about that. If you don't want to live with a smoker or you'd prefer to live with someone who doesn't work from home because you do - make this clear from the start. Open communication is key to finding a great roommate.

Run background checks

Once you find a promising candidate, it's time to verify their suitability. Request references from their previous landlord/s, focusing on aspects like timely rent payments and overall tenancy behaviour. Consider verifying their employment to ensure financial stability. In some states, like Queensland with its TICA database, you can check for a history of tenancy issues. If a potential tenant appears on such a list, it would be wise to reconsider them.

Finalise the rental agreement

You've found a good tenant, now it's time to solidify the details. Walk through the rental agreement together, answer any questions, and make sure everyone feels comfortable moving forward.

What are the costs of renting out a room in your home?

Renting out your spare room can be a tempting way to bring in a bit of extra income. But before you dive headfirst, it's important to understand not just the potential income, but also the expenses involved in renting out your spare room. In some cases, the costs can outweigh the benefits.

Here's a breakdown of the key financial considerations when renting out a room:

Upfront costs

Before welcoming a new tenant, you'll likely need to invest some time and money into getting the room and your home "tenant-ready." This might involve:

  • Refurbishments: Is the room a bit outdated? Fresh paint, new flooring, or updated fixtures can significantly enhance its appeal and attract better tenants, potentially allowing you to command a higher rent.
  • Furnishings: Depending on your agreement, you may need to provide basic furniture like a bed, dresser, and desk.
  • Repairs: Address any existing maintenance issues, from leaky plumbing to faulty light switches.

Remember, these initial investments are not pure expenses. They can significantly increase your chances of finding a good tenant quickly. Additionally, some costs, like painting or minor repairs, may be partially tax-deductible, further offsetting the initial outlay.

Increased utility usage

Having another person in the house naturally translates to increased utility usage. By being aware of these additional costs upfront, you can set a realistic rent that covers your expenses and provides a fair return on your investment.

  • Water: Additional laundry cycles, showers, and dishwashing will all raise your water consumption. Consider installing water-efficient appliances or implementing water-saving habits.
  • Electricity: Lighting, electronics, and potentially additional appliances used by your tenant will all contribute to a higher electricity bill. You might want to discuss potential cost-sharing strategies with your tenant, or factor an estimated increase into your rent calculation.
  • Gas (if applicable): The cost of heating water or running gas appliances will likely increase with an extra person in the household.

Insurance

Renting out a room may necessitate adjustments to your homeowner's insurance policy. Here are two key points to consider:

  • Standard homeowner's insurance: Review your existing policy to determine if it covers potential risks associated with renting, such as damage caused by the tenant or their guests. You might need to add an endorsement or rider to your existing policy for adequate coverage.
  • Landlord insurance: Consider getting separate landlord insurance. This type of insurance specifically protects you against tenant-related risks, including property damage, theft, or liability issues that may not be covered by your standard homeowner's policy.

Contact your insurance provider to discuss your specific situation and understand the different coverage options available. While landlord insurance adds an extra cost, it provides valuable peace of mind knowing you're protected in case of unforeseen circumstances.

Property management fees

If you're looking for a more hands-off approach to renting out your spare room, property management services can be an option. However, these services typically come with fees that need to be factored into your financial calculations. Here's what property managers typically handle:

  • Tenant Screening: Property managers can take care of advertising the room, screening potential tenants, and conducting background checks. This can save you time and effort in finding a reliable and responsible tenant.
  • Lease Agreements: They can prepare and manage lease agreements, ensuring all legalities are addressed and protecting your rights as a landlord.
  • Rent Collection: Property managers can handle rent collection, ensuring payments are made on time.
  • Maintenance and Repairs: They can manage maintenance requests and coordinate repairs.

While using a property manager can be convenient, the costs of hiring one can eat into your rental income. You should weigh the pros and cons carefully to determine if hiring a property manager makes sense for your situation. You may find that it's not really necessary to hire one if you're just renting out your spare bedroom (as opposed to an entire property).

Some of the best home loan deals for homeowners who want to save

You could potentially lower your interest rates and reduce your monthly payments by refinancing your home loan to make the management of your rental property more financially feasible. Here are some of the most competitive refinancing deals on the market.

Update resultsUpdate
LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
6.04% p.a.
6.06% p.a.
$2,408
Principal & Interest
Variable
$0
$530
70%
Featured Online ExclusiveUp to $4k cashback
  • Immediate cashback upon settlement
  • $2000 for loans up to $700,000
  • $4000 for loans over $700,000
5.94% p.a.
5.95% p.a.
$2,383
Principal & Interest
Variable
$0
$0
90%
5.95% p.a.
5.95% p.a.
$2,385
Principal & Interest
Variable
$0
$0
90%
5.99% p.a.
5.90% p.a.
$2,396
Principal & Interest
Variable
$0
$0
80%
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of .

Tips for finding a good housemate

Leverage your network

Skip the hassle of advertising, lengthy viewings, and background checks by leveraging your network. Ask your family, friends, or work colleagues if they are looking for a room to rent or if they know someone who is.

Place an ad online

Advertising your room online is a great way to find the perfect tenant, but remember to keep your personal information private. Don't give out the full address in the listing - just your first name and the suburb. Use a dedicated email address for rental inquiries if you can, or only give out your phone number to people who have enquired about the room - don't put it in the ad.

Conduct interviews

When considering potential tenants, it's important to gather some key information to ensure a good fit. Make sure to ask them about their employment and income so you know they can comfortably cover the rent. Also ask about their previous rental history. Understanding their past rental experiences can provide insights into their responsibility as tenants. Ask about previous landlords and the possibility of contacting them for references.

Set clear expectations

Before your new housemate arrives, discussing some house rules can prevent confusion and ensure everyone's on the same page. This can cover things like cleaning duties, chores, fridge space, how common areas are used, and rules for having guests over. It's important to set these expectations early on and make sure they're being met to prevent resentment from building up later on.

Get references

Follow up with rental references to confirm their payment history and responsibility as a tenant. Most landlords are happy to answer your questions. Consider running a background check. This can provide valuable insights into a potential tenant's creditworthiness and rental history.

Lastly, trust your gut. If something feels off about them, don't ignore it.

Does home insurance cover renting out a room?

Typically, a standard homeowner's insurance policy does not extend coverage to property or possessions damaged by flatmates, room lessees, or non-family residents.

If you're generating income by renting out part of your residence, you might be categorised as a landlord for both tax and insurance purposes. Securing landlord insurance becomes crucial to protect your property from potential loss or damage caused by tenants or housemates, whether accidental or intentional.

In the event you're considering listing your home on platforms such as Airbnb or Stayz for shared housing, a specialised short-term home and contents insurance policy may be necessary. It's essential to carefully review the policy's product disclosure statement (PDS) to understand what is covered and excluded.

How does renting out a room impact my taxes?

If you're renting out a section of your home, the rental payments you receive are considered taxable income according to the Australian Taxation Office (ATO).

You must report this income as rental earnings on your tax return, and you can deduct related expenses, but these deductions must be proportioned both for the duration that the property or room is leased and for the specific portion of the property that is rented.

Ownership status doesn't alter the requirement to declare this income; it must be declared by the property's owners based on their interest in the property. So if you're renting an apartment under a 12-month lease and occasionally rent out a room through an online platform for example, you are obligated to report any revenue generated from such rentals.

Additionally, you might be liable for capital gains tax (CGT) upon selling the property. Renting out any part of your primary residence generally results in a partial forfeiture of the CGT exemption for primary residences.

It's essential to maintain records including:

  • Platform statements detailing your income.
  • Receipts for any expenses you intend to deduct.

If you are only renting part of your home, for example a single room, you can only claim expenses related to renting out that part of the home. This means you can't claim the total amount of the expenses - you need to apportion the expenses for both private and income-producing use.

As a general guide, apportion your expenses based on the floor-area solely occupied by the renter (user), and add that to a reasonable amount based on your guest's access to common areas.

You can only claim expenses for the days in a year when the room was rented to a client. When a room in your home is not being rented out, it is treated as being used privately as part of your home.

Photo by Pixabay