How To Save Money By Renting Out A Spare Room

When I joined Compare Club to write about mortgages, savings and all things financial it was a bit of a wake-up call.

I mean, how can I write about all of this without taking it onboard and putting it into practice? After all I can't really ask you to be better with your money if I'm not asking the same of myself.

Mission #6 – how to save money by renting out a spare room

Mortgage costs are going up, I've thankfully got a split mortgage and only paying an extra $200 a month right now... but in June that all changes, and I am going to take about a $1000 hit.

And that's if the variable rate lands at a 5.5%.

🫰🏻The average Aussie mortgage holder is currently paying $919 extra month on a $600K home.

😣 And with rents increasing too – 23% in Melbourne this year – everyone is feeling the pain.

👀 Rising energy prices are also biting into household bills, mine included, which are up about $500 this year for my two bedroom place.

So how much do I spend on my housing costs a month?

This is a locked in cost for me really but it's good to compare it against how much I could save by renting out a room.

🧮 Here are my sums...for 2023 paying 5.5% on my $580K mortgage:

$120 electricity and gas (I carbon offset it all, or $1440 a year)
$670 strata fees ($8K a year)
$125 council fees ($1520 a year)
$55 water/sewerage services ($660 a year)
$120 upkeep ($1200 a year)
$80 internet ($960 a year)
$3700 mortgage payment (44,400)
$100 contents ($1200 a year, building is covered by strata)

Total: $4970 a month

So, that's a whole lot more than I thought

Okay, but it's done and I know the reality of running my home which is good.

✂️ I work two jobs, which definitely helps me pay my bills and still save... but a flatmate could potentially help cut my outlay a lot.

💪 I am also very lucky because I live in a tight rental market near the beach and train station in Sydney's Eastern Suburbs so renting out my spare room should be pretty easy.

🐈 Looking at the market, a fair price is $350-$400 plus bills, but because I do cat rescue, I think $350 including bills is reasonable.

Here's my rent-out-a-room lessons...

Think about tax. Renting out a spare room is an income, but it is one you can claim against. You do need to be aware that you might have to pay some capitol gains tax when you sell though.
Size matters. In essence you have to work out how much you and your flatmate share and then split costs you can claim on tax – e.g. My house is a 55% me and 45% flatmate arrangement. So, I can claim my strata fees as a deduction of 45% x $8K or $3.6K. The ATO explains it here.
Included bills. Now, because I am looking to include bills it also means I can claim those, so 45% x $2440 which is $1098. Be aware: if they are splitting bills with you, you can't then double claim – the ATO is literally watching.
Other costs you can claim include... the full cost of advertising the room, home insurance, interest on your loan each year (that's a lot by the way) and cleaning costs. You can also claim depreciation costs for furniture specifically for your tenant but that's a bit too complicated for me.
Extra income. And, yes, that's a bonus but you need to make sure you set aside for tax. The way that I'll do it is at 40% (because my worst case tax rate is 37 cents in the dollar) that way it's like forced savings. So for me that would be $350 a week rent x 40% or $140 to tax, leaving me with $210.
Yes. I am likely to get more of that back at the end of the year but I don't like surprises and this way I have a kitty that can sit in my offset reducing my interest payments. A win-win really.
There are other benefits too. Sharing isn't easy by any means but it does mean I have a cat sitter when I go away and we can split cleaning duties and Friday night pizza costs.
Is it worth it? I'll have to tell you later as I have had some pretty awful share experiences – not as bad as my friend who's flatmate went missing three days in though, she had to drop his things at the police station. If you're wondering he never turned up again – very scary.
Pros win. For me right now, the benefits of having a flatmate out way not having one, and with interest rates still going up it means I can pay my mortgage and still live (a tiny bit).
So what does it add up to? For me renting out my spare room could add up to $10,920 extra a year after tax.