Barefoot Investor Scott Pape: Open the door to renting out spare room but check with accountant first

CHECK with your accountant before taking on a boarder or renting a room on Airbnb, advises Scott Pape.

Should you rent out your spare room?

QUESTION: I’m a single mum who after 24 years has finally got the kids off my hands. I’m now left in a big three-bedroom home. I’ve been thinking about renting out a room with Airbnb to pick up some extra money, and I’ve even toyed with the idea of taking on a boarder. But what are the tax implications of doing this? Jen

 

ANSWER: You’ll need to declare any rent as taxable income, and doing so will affect the tax-free status of your home to a certain degree for the period you rent it out (check with your accountant). If you try and do it on the down-low, there’s a good chance you’ll get found out — and whacked with the regulatory rod. The ATO data-matches your bank accounts, and it’s also rumoured to keep a close eye on websites such as Airbnb and Gumtree. To free up some cash, a better option could be to downsize.

 

DOWNSIZE FOR FREEDOM

Q: I am a single mother with two kids. I service, on my own, a $900,000 mortgage (interest only) on our home which is probably worth $1.7 million. I have no other debts, and I earn $175k on a four-day week, so I have the capacity to earn more. I need the three-bedroom place because I have live-in help so I can hold down my job. Am I bonkers? Perhaps I should rent out my house (for around $1300 a week) and rent cheaply elsewhere. Or should I sell and move into a three-bedroom unit? I think I’m currently breaking many of your rules! Melanie

A: Here’s what I think may have happened: when you divorced your husband you decided to keep the family home for the sake of your kids, so they’d have some stability amid the upheaval of the divorce. It’s an educated guess — that’s how most mothers think in a divorce. The problem is that most mums can’t afford to take on a mortgage on a single wage, but you can — well, financially at least. Yet let me make another educated guess: if you’re earning $175,000 a year for four days’ work, the job you’re doing is demanding and draining. There’s no such thing as a free lunch. So, your first priority is to look after yourself. Your second priority is to look after your kids. You’re in the unique position that you could downsize and have a small mortgage — or even be debt free. Then you’d have the ability to spend more time with your kids and less time at work over the next few years. Your kids don’t care where they live, they care about you.

MORTGAGE SOLUTION

Q: I’m turning 30 this year and I live at home with my retired parents. I’m helping them to pay off the family home as they hit some financial trouble five years ago — I contribute $1400 monthly and my sister $1700. There’s $90,000 left on the debt. There’s no question that I’ll continue to help my parents, but I’d like to move out soon (ideally buy, not rent) without entirely forgoing holidays and small luxuries here and there. I earn $70,000 a year. How should I manage my finances to maximise my situation? Elise

A: So you’re effectively paying $350 a week in board. That’s not a bad deal, though you won’t be able to do it when you move out (you’re taking home about $1000 a week after tax). But I suspect from your question that there’s a bit more going on behind the scenes. So here’s what I’d do if I were in your situation: I’d sit down with your parents and talk to them about how you’ll achieve your financial goals. Explain to them that it’s time you got your own financial house in order, or you risk struggling later in life. If they put pressure on you to continue paying after you leave, I’d offer to pay for them to have a financial planner advise them on their situation, or suggest they get in a boarder to help with the drop in income. Either way they need all your love and support, but not your money.

WISE STRATEGY FOR CASH

Q: I can confirm that your advice regarding saving does work. It is indeed simple but not easy. I’m 42 and my partner is 46, and we have managed to save $700k between us. We also own a block of land that we are hoping to sell for $400-500k. We feel that in recent years asset prices have been over-inflated, so we have been moving to cash. But low interest rates have been testing our convictions on cash. Any suggestions how savers like us can grow their wealth in the current economic environment? Tracey and Matt

A: Good work on the savings. Know this: your ability to save large amounts of your income is not only a sure sign of wealth and emotional maturity, it’s also going to hold you in good stead for whatever happens to the economy in the future. Now I would strongly advise against holding $1.2 million in cash. Keep six months of Mojo and then invest the rest — but definitely don’t do it all in the one hit. Reason being, I don’t have a crystal ball and I don’t know when the next crash will be. A better, more time-tested strategy is to drip-feed your money into the market via a set amount each month. That way you smooth out your average buy-in price. Your set dollar amount will buy you more shares when the market is low, and less when prices are high. As Warren Buffett famously advised: “If you invest in a very low cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90 per cent of people who start investing at the same time.”

 

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Originally published as Barefoot Investor Scott Pape: Open the door to renting out spare room but check with accountant first