What to Know Before Renting Out a Room in Your Home

Renting out a room in your house can seem a straightforward way to generate 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 legal obligations to tax implications.

Here are the key considerations involved in renting out a room in your home and some practical tips to help navigate the process with confidence.

Can I rent out a room in my house?

Most homeowners in Australia can rent out a spare room, and doing so could help bolster homeowners’ budgets, potentially helping them meet mortgage repayments, or even allowing them to make extra repayments to repay their mortgage faster.

However, renting out a portion of your home can spark legal, insurance, and tax complications.

If you’re a renter yourself and considering renting out a spare bedroom, things may be a little bit trickier. Most rental agreements forbid subletting (renting out part of the property) without written permission from the landlord. Breaching this clause could lead to eviction, so make sure to talk to your landlord before advertising a room for rent.

However, the first step is to determine if you’re the type of person who would find success in sharing your house with another person. 

“This is not a small adjustment to make,” Tenants’ Union of NSW CEO Leo Patterson Ross told YourMortgage.com.au.

“Be clear on what areas are to be private for the flatmates, and which are shared and what rules you will seek to impose on the person.

“[Homeowners] should also consider the tax implications – renting out part of the dwelling can have implications for income, land and capital gains tax.”

Do I have to tell my home loan lender if I rent out a room?

If you have a mortgage, there’s no need to tell your lender you’re renting out a room in your home.

Confusion on this matter likely stems from the fact that home loan lenders tend to advertise different interest rates for homeowners and property investors. Renting out a room or space in your home doesn’t mean you need an investment property loan.

Additionally, if you’re in the market to purchase a home and plan to rent out some space once you move in, you might find you’re able to borrow more, as your lender may factor the extra income into its calculations. This is particularly likely if the property has a granny flat or self-contained studio, meaning you wouldn’t share amenities with a tenant.

What you should do before renting out a room in your house

Key steps

• Prepare the room
  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, consider 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.

• Advertise your spare bedroom
  Spread the word using real estate websites, social media , and 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.

• Run background checks
  Once you find a promising candidate, it’s time to verify their suitability. Request references from their previous landlords and consider verifying their employment to ensure financial stability.

• 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.

Expert tips for crafting a rental or flatmate agreement

Depending on which state or territory you live in, a person renting out a room in your home might be considered a tenant or a boarder or lodger. This distinction, while seemingly minor, can have legal implications.

“Where the owner, or a representative of the owner, is living in the home as well then other flatmates are assumed not to be tenants but instead have a lodging licence,” Mr Patterson Ross said.

“This gives significantly fewer protections to the flatmates, including around eviction without consideration of circumstances.”

Here’s a basic overview to determine whether you’re most likely looking for a tenant, a lodger, or a boarder:

• Tenant
  A tenant usually has exclusive possession of an entire dwelling. If the area you’re renting out is self-contained, like a granny flat or studio with its own kitchen, bathroom, and lockable external entrance, you might be dealing with a tenant.

• Lodger (often referred to as a flatmate or roommate)
  Lodgers pay to occupy a room and share facilities such as the kitchen, bathroom, and living spaces.

• Boarder
  If you provide additional services like meals or laundry along with the room, the person is likely a boarder rather than a tenant or lodger.

“When creating a lodging agreement, currently the rules are able to be set by the owner without much regulation,” Mr Patterson Ross said.

“In NSW, the state government is developing the Shared Accommodation Act to set up rules that cover all sorts of shared accommodation.”

Until your state or territory has such rules in place, or once they’re implemented, it’s important to be clear on what is and isn’t included under a flatmate or tenant agreement in order to avoid disputes, the expert noted.

“This includes defining private and common areas.

“If there are to be house rules set by the owner rather than negotiated these should be provided before you agree to move in.

“Receiving rent receipts is definitely important [for flatmates], as is defining notice periods for access and ending agreements.”

Because definitions and rules can differ across jurisdictions, it’s probably best to seek legal advice or check in with your state’s tenancy authority before entering into any tenancy or lodging agreement.

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

The prospect of renting out your spare room might be tempting but before you dive headfirst, it’s important to understand the expenses involved. In some cases, the costs could 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 enhance its appeal and attract better tenants.

• 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 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.

Insurance

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

• Standard 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 policy.

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.

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Common pitfalls experienced by homeowners renting out spare rooms

The majority of issues the Tenants’ Union of NSW sees arise out of shared accommodation agreements between homeowners and flatmates come down to owners’ willingness (or unwillingness) to actually share their home.

Instead, many attempt to control the actions of other people paying to live in their house – this could happen deliberately and overtly or unconsciously.

“It’s important to recognise that this is to be home for everybody living there – trying to say one person’s home is more important than another’s can create unpleasant situations,” Mr Patterson Ross said. 

“Being open and honest about expectations for everyone is important in finding any flatmate arrangement.

“Many issues arise because personal preferences don’t align, and too often we see people use the law to try and resolve what’s really a personal dispute.

“Documenting agreements and sticking to them is also an important way to avoid disputes into the future.”

Does home insurance cover renting out a room in your house?

A standard insurance policy generally doesn’t offer coverage for 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. Thus, you’ll likely need to secure landlord insurance to protect yourself and your property from any loss or damage caused by housemates, whether accidental or intentional.

In the event you’re considering listing your home on a platform like Airbnb or Stayz, you might need a specific short-term home and contents insurance policy.

How might renting out a room impact my taxes?

Any rental income is considered taxable by the Australian Taxation Office (ATO). That means you must report rental earnings on your tax return, and you can also deduct related expenses.

These deductions must be proportioned for the duration the property or room is leased and for the specific portion of the property being rented.

Ownership status doesn’t alter the requirement to declare this income. So if you’re renting an apartment and occasionally offer a room through an online platform, you’re obligated to report any revenue generated.

If you are only renting part of your home, you can only claim expenses related to renting out that part of the home. As a general guide, you should apportion your expenses based on the floor-area solely occupied by your flatmate and add that to a reasonable amount based on your guest’s access to common areas.

Capital gains tax considerations when renting out a room

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

Charging rent to a family member vs renting a room to the general public

It’s important to mark some key taxation differences between charging nominal rent to an adult child or family member roosting with you and receiving market rates from family or a member of the general public. It essentially comes down to whether you could expect to make a profit on any rental income received.

Domestic arrangements

• Rental income generally isn’t taxable
• Expenses generally can’t be deducted
• Principal place of residence (PPOR) capital gains tax (CGT) exemption generally stands in full

When a family member lives in your home and you charge them some amount of nominal rent to meet expenses, the ATO will probably determine that to be a ‘domestic arrangement’. A domestic arrangement won’t impact a homeowner’s income tax year-to-year or CGT liability when they sell their property.

Commercial arrangements

• Rental income is taxable
• Expenses are deductible
• Partial loss of PPOR CGT exemption

On the other hand, renting out a room in your home at market rates will probably be considered a ‘commercial arrangement’.

That means that rental income is taxable and some expenses (or a portion of them) may be able to be deducted from a homeowner’s taxable income.

It also means that, when the time comes to sell the property, its owner might face CGT on the portion of the sales proceeds related to the area of the property being rented out for the duration of the time it was rented out.

What if you’re charging cheap rent?

• Rental income is taxable
• Expenses can only be deducted up to the value of the rent (no negative gearing)
• Partial loss of PPOR CGT exemption

In the instance you’re charging cheap rent, perhaps to help an adult child out or from the goodness of your heart, you might face slightly different tax treatment.

If you’re charging below-market rent for your spare room but you’re still making somewhat of a profit, you’ll be treated as if you’re in a commercial arrangement, but you won’t be able to use negative gearing. That is, you won’t be able to claim more in expenses than you brought in in rental income.

Listing a spare room on a short-stay platform like Airbnb or Stayz can be an appealing way to earn extra income, particularly if you live in a tourism area or have a self-contained space. However, short-term letting comes with unique rules and responsibilities.

First, make sure to check your local council regulations. Some councils restrict the number of short-stay rentals in an area or require hosts to be approved before listing their property. In some areas, there are also limits on how many nights per year you can rent out a room or property, and some councils charge higher rates or additional levies on properties rented out as short-term accommodation.

If you live in an apartment or townhouse, it’s also worth checking if your strata by-laws allow for short-stay hosting.

From an insurance perspective, standard home and contents policies typically don’t cover damage caused by short-term guests, so you may need to take out short-stay or holiday rental insurance.