Homeowners can rent it out and rake it in

RICHARD MEADOWS
Last updated 05:00 30/01/2013
Piggy bank
MAKING MONEY: Empty rooms are an untapped asset.

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New Zealanders are sitting on top of a juicy cash cow. It is quite possibly one of the biggest untapped assets in the country.

No, it's not coal, natural gas, or precious metals. It is spare rooms.

There are hundreds of thousands of barren bedrooms around the country, filled up with accumulated junk and debris or not used at all.

Renting them out would not only take some of the heat out of the housing market - it would also fill homeowners' pockets with cash.

Of course, after years of flatting, sharing with outsiders will be the last thing on the minds of many first home buyers.

It doesn't matter if it is a stranger or a close friend; having someone else living in your home can really cramp your style.

But what price do you place on the freedom to walk to the refrigerator in the nude or warble heartfelt arias in the shower?

The prospect of earning an extra $5000 to $15,000 cash each year could be enough to make it all worthwhile.

Those who stand to benefit most are those with giant mortgages. That's because any extra income that can be diverted to chipping away at the loan makes a huge difference over time.

Let's say you have a $400,000 mortgage. Over the course of a 20-year term, you will have paid the loan price twice over with accumulated interest.

What happens when you throw a flatmate into the mix, contributing a very modest $150 a week?

Suddenly, you've knocked six years off the loan and avoided more than $140,000 of interest payments.

Add another flattie and you're down to 11 years - almost halving the original term.

Of course, putting up with live-in lodgers for more than a decade is going to be a stretch too far for most people.

But even sharing for the first few years can vastly reduce the amount paid.

Just don't plan on wowing your bank manager with all your boarder income when you apply for the mortgage in the first place.

Banks give very little weight to rental income when they're weighing up applications.

"They do limit it to 50 per cent of what you're being paid, and they also limit it to $100 a week," says mortgage broker Steve McGowan, managing director at Advoco.

That paltry sum isn't going to make much difference in how much you can borrow - which is probably a good thing anyway.

By McGowan's estimate, about 30 to 40 per cent of new homeowners are open to the idea of letting a room.

"Some people do need to, simply because they are short on cash," he says.

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It is relatively common among younger childless couples, and especially single homeowners. For older couples with kids, not so much.

And in some cases, people are actively trying to get away from the whole flatting experience.

"When you're nesting or you're looking after your place, you've got someone who maybe doesn't have the same habits as you," says McGowan. "It could be a burden."

BOARDERS

Whether you take on a "boarder" or a "flatmate" matters, because they are not the same for tax purposes. Having a boarder implies the provision of services of some kind; power and water, usually meals, and sometimes laundry.

Inland Revenue maps out the standard cost of boarding services each year, which was $247 a week per tenant during 2012.

Any income earned below that threshold is completely tax-free. You do not have to declare it or bother keeping any records.

If you're charging more than that, use the calculator to work out how much to pay on the ird.govt.nz website.

It is also worth noting that the tax-free threshold drops if you have three or more boarders at once.

If you don't want to use the Inland Revenue's cookie-cutter method, you are also allowed to collect receipts for all the actual costs and use them to work out taxable income.

To protect your neck, the Citizens Advice Bureau recommends having a signed boarding agreement covering weekly payments, which services are covered, and the notice period for moving out.

HOMESTAY STUDENTS

Playing host to an international student is a popular way of earning a bit of cash and to engage with another culture.

Homestay fees typically fall between $180 and $250 a week, which means they will usually be tax-free.

Whitireia polytech's international marketing manager, Greg Walton, says the motivation for deciding to host a student is different for each family. "For many, it's because of the cultural advantages to share with their own children of the same age."

Walton says the usual host family dynamic is mum and dad with similar-aged kids, or empty-nesters looking for company.

The prospect of trying to bridge language and cultural barriers to deal with a hormonal, homesick teenager will not appeal to everyone.

But Walton says Whitireia's 1000 exchange students usually adjust well through the transition phase.

All up the financial benefits are not huge, but unless you're feeding a couple of young Japanese sumo wrestlers there should still be a margin to earn some pocket money.

FLATMATES

If you decide to take on a flatmate, the tax situation is slightly trickier. You will have to work out all the expenses that you can deduct against the income, such as fittings, insurance and rates.

Leech & Partners director Chris Heffernan, a seasoned tax accountant, says a common way to do it is to divide up the floor area. Your flatmate's room would be 100 per cent deductible, shared areas would be 50 per cent (assuming two occupants) and your private spaces would be 0 per cent.

Technically, you are meant to keep receipts to prove every last expense. However, Heffernan says the risk of getting audited is "incredibly small".

The taxman has better things to do than chase small-fry: "If the income's even $5000 and the expenses are half of that, with the amount of effort involved in checking everything . . . they could just go after a big boy and get gazillions."

COUCH SURFERS

During the Rugby World Cup, a lot of New Zealanders cottoned on to the true value of their empty rooms. Many made a killing by renting them out for a few days or weeks. But there doesn't have to be a big event on to make some money.

Lower-budget travellers have taken to websites like airbnb.com to find somewhere casual to crash. The more than 1200 local listings on the site range from luxury bed and breakfast arrangements to a simple couch.

Airbnb member Nareeta rents out a room in her Geraldine house to roaming travellers, all of whom have left glowing reviews. "I have found the experience enjoyable, met nice people, and earned some pocket money," she says.

Inland Revenue does monitor these sort of listings - or at least suggests it does - so make sure you keep track of and declare any extra income.

- BusinessDay.co.nz

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