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What are the pros and cons of letting rooms to tenants?

11:30 AEST Tue Mar 22 2011
What are the pros and cons of letting rooms to tenants?
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By Diana Clement, MSN Money expert

Mortgage payments can severely dent your wallet. But there are ways of making those payments less painful. One is to let rooms in your property to flatmates or even buy a "home and income" property.

It makes sense to buy a first home larger than you need for your own purposes. That way you can make money from the spare bedrooms.

Some homeowners move walls to add extra bedrooms or build sleep-outs or "minor dwellings" on their properties to house more people and earn more money. Always make sure you contact the council before doing something like this.

Some of the disadvantages of letting rooms out are that your lovely home isn't fully your own and in theory flatmates or boarders could damage the place. But it's a small risk to take if you need the money to make your mortgage payments in the early years.

If you are looking to buy a "home and income" property, get your lawyer to look over the paperwork well to ensure it is fully legal. If you buy a property with illegal renovations or additions, you could run into trouble with the local council for breaching the Building Act or Building Code. Tenants can also apply to the Tenancy Tribunal for an order to terminate the tenancy, seek compensation and punitive damages if you let a property that doesn't comply with all building and health and safety laws.

If you do buy a property with a sleep-out that can't be let as a separate tenancy, you may be able to let it legally to flatmates, boarders, or international students, treating it as an extension of the main home.

The Residential Tenancies Act now applies to flatmates and people boarding in your home. And the building laws still apply as well and if you're caught by the council, illegal renovations made by you or a previous owner may need to be ripped out.

Finally, don't forget to tell your insurance company if you have a boarder or tenant on the property because they may affect your cover.