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Boarding - Or commercialising one's abode

Discussion in 'Real Estate' started by JudgeDreadz, 12th Jan, 2010.

  1. JudgeDreadz

    JudgeDreadz Well-Known Member

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    Hi all

    As some of you may have seen in my previous posts, I am planning on renting out the second bedroom of my 2 bedroom apartment.

    I would really like some advice on the following issues:

    1) what are good tips on finding a good boarder (I know, countless sites for this, but I would like to get the opinions of invested members)

    2) what formal documents will I require to make this happen (I plan on declaring everything so I can get apportioned tax deductions on interest repayments)

    3) any other advice you can give someone with no clue in this area (I have only recently moved out of the parents nest and have not lived with anyone but the immediate family = folks and one younger sister)

    My ideas so far = thinking about getting a nice, quiet studious international student from one of the surrounding universities.

    Much appreciation in advance for your help
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I'm not sure if this came up in the other thread - but have you taken into account the capital gains tax implications of claiming deductions against your PPOR interest payments?

    Essentially, you will lose part of the CGT-free status of your PPOR when you declare income and claim expenses against your property.

    You'd need to do the sums as to whether the short term gain you might get from claiming the expenses will outweigh the long term costs of having to pay some CGT when you sell.

    Have you also checked with your accountant to see whether the ATO will actually allow the claims to be made? Generally the ATO will expect that for these expenses to be deductible that there is a reasonable expectation of profit from the "investment" (or "business venture" as the case may be). Given that this is your PPOR and you will be claiming interest costs and such - one can only assume that you expect your expenses to be greater than your income ... but given that there is not likely to ever be a profit made, the ATO may well disallow the deductions. I'm not saying this is definitely the case, but you should check on this.

    Essentially, unless you are running a "boarding house" as a business ... I would suggest that you could generally just pocket the income from the boarder tax free (ie without declaring it and without claiming any expenses).

    It's like running a business which the ATO considers to be a "hobby" - they don't allow you to claim expenses for unprofitable ventures which are not really run in a business-like manner.
     
  3. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi JD

    I had students living with me in the past. In the end I realised, the small amount of rent, wasn't worth the intrusion into my life. Be aware with what you are getting into!

    1. Students are cheapskates. You won't get much money from them.
    2. students may damage your personal property.
    3. Students have friends. You may not like them.
    4. Students are messy.
    5. Student stay up late.

    I suggest you create an Absolute rules set, Before you let. As you interveiw, inform the potentials of these rules. I suggest the following:

    1 pick the same sex.
    2 pick a student who speaks good english.
    3 At the very start, tell them what they(absolutely) can and cannot do.
    4. Rent must be payed on time.
    5. Not to give spare keys to their friends.
    6. Don't put up with illegal activities.
    7 Share chores (dishes, cleaning)
    8 Be Very rigid on expenses (electricity, phone)
    9 your food is your food
    10 no impromtu partys:eek:



    Hope I haven't scared you, Johny.
     
  4. JudgeDreadz

    JudgeDreadz Well-Known Member

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    Thanks

    Thanks very much Sim and Johnny. Your advice is mucho appreciato.

    Question: if I didn't declare the income from rent, is it then advisable to keep the leasing agreement informal as well?

    What about insurance? Do I need to set landlords liability insurance if I have a border? if so, does that leave a paper trail of undeclared funds to the ato?
     
  5. Johny_come_lately

    Johny_come_lately Well-Known Member

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    I don't know quite how to say this. But (some) people take the cash and run.
    The tricky bit is the bond. Most renters know it must be put in a bank account these days. Also, consider your renter if s(he) is using centrelink. Wouldn't look good if s(he) was claiming rent assistance to your address.

    Will some of your household property be destroyed? It's possible. I had some damage. I had no insurance. Landlord liability insurance would probably have wiped out my rent!

    So do your own research and post back your decision, and why. I'd like to know what the govt. position is.



    Johny.
     
  6. Magpie

    Magpie Active Member

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    Hi JudgeDreadz,

    My experience of shared accommodation - which I used for a decade or so - was that it's definitely well worth doing, provided that you understand that it never really works properly... :confused:

    This might sound conflicting or odd but all the experiences, good and bad, that I had in shared flats and houses proved to be a great learning course for the ultimate test of accommodation sharing - marriage.

    In both cases you have to learn to be tolerant and accept compromises, develop a system for resolving differences, etc. You'll never get everything you want all the time... ;)

    The sort of things that never worked evenly in the places I shared ranged from the different hours people kept, varying standards on house cleaning and or cooking, who paid which share for what, and so on. For instance, in all the flats and houses I shared we never found a system that sorted the phone bill out without somebody feeling they had been dudded. Similarly with food (I remember one couple getting their knickers severely twisted about who had used the last of the butter. Wow! Let's call in the UN peacekeepers....) electricity etc.

    Apparently having one all inclusive charge can work quite well to cover things like rent, house insurance and electricity (now that most of us have a mobile phone) and even cleaning. One guy on another forum who lets places used a weekly cleaner whose cost was included in the total rental package. Food can be trickier - who cooks what and when, use of fridge, food smells etc. As Johny said you have no control over what their mates are like either.

    But I had some great times during those years, and I'm sure that my sharing days were the apprenticeship that allowed me to subsequently navigate through 30 years of marriage with relative ease.

    Good luck, and try to accept the bumpy bits when and if they come. :cool:

    Cheers,

    Chris
     
  7. Johny_come_lately

    Johny_come_lately Well-Known Member

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    AhhhhhhhhhhhhhHaHaHaHaHa Now I know why I've never been married!




    Johny.
     
  8. JudgeDreadz

    JudgeDreadz Well-Known Member

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    i see. the whole reason i bought my own place was so i would not have to compromise. hahaha. thanks for your help guys
     
  9. JudgeDreadz

    JudgeDreadz Well-Known Member

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    Hi Sim -> please give this to me honestly.

    Am I naive for thinking I can hold onto a property until I die?

    That is, the place is great and I cannot imagine selling it (probably the honeymoon period). When it comes time to upgrade (min 5-7 years), I can probably have it positively geared and use the equity to purchase a new home.

    That said, it is a relatively old block (built in the 70s), will it yield diminishing returns the older it gets?
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    There's no reason you can't hold onto a property until you die and thus defer any capital gains liability effectively forever.

    You do need to understand that as a property ages, it does become more expensive to maintain - but the value and income (for an IP) you get from it should also increase to help offset those costs.
     
  11. JudgeDreadz

    JudgeDreadz Well-Known Member

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    my thinking exactly. thanks Sim
     
  12. JudgeDreadz

    JudgeDreadz Well-Known Member

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    Hi Sim (and all the helpful peeps contributing to this thread)

    It does make sense that as a property ages it requires more maintenance. Our strata seems to be well managed. We have just had a roof replacement and have about 80-100k in surplus.

    In your experience(s) would this be enough to cover ongoing maintenace for an aging building (the building is about 40 years old, built in the 70s) without drastic increases in the strata levy ($420 p/q).
     
  13. JudgeDreadz

    JudgeDreadz Well-Known Member

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    Hi Sim - sorry to dig up these old threads. But I just wanted to ask -

    How does one determine whether their expectation of profit is reasonable? From what I have read this is something of a grey area with no definite rule. Is this true?
     
  14. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    My understanding is that there is no definite rule, as with many things tax related.

    If the investment was never going to return an income, the ATO will probably take a dim view of claiming deductions against expenses incurred.

    I'd have to do some hunting to find some examples published by the ATO.
     
  15. JudgeDreadz

    JudgeDreadz Well-Known Member

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    So if I understand you correctly, it is the expectation of income rather than profit.

    If you can find examples Sim I would greatly appreciate it. I fail at Google.
     
  16. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I wasn't differentiating between income and profit. I take "income" to mean "not a loss". In business, you would generally differentiate between "income" and "cashflow".

    Cashflow is the money coming in. Expenses is the money going out. Income is the difference between the two. If this figure is negative, it's called a Loss.

    If you are running a business, read up on "non-commercial losses".

    There may be a question as to whether you are actually running a business, or you are merely engaging in a hobby.
     
  17. JudgeDreadz

    JudgeDreadz Well-Known Member

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    sure, thanks Sim!