Blogs | September 23, 2015

Should I buy a house and rent out part of it?

Naren asks: I am thinking about buying a house, living on one floor with my wife (no child), and letting out another floor. Do you feel this is a good idea, especially from a tax-saving perspective?

Ian answers: Naren, this might be worth it – if it is done carefully. Renting can be a risky business, depending partly on the laws in your country. I wonder if you are considering buying a house that you cannot easily afford on your current income.

Having it all
Let’s assume the mortgage gets approved. Having a tenant to earn a little extra cash seems sensible on the face of it – but can actually be a bad decision. Unless there’s a pay rise or a windfall to reduce the mortgage debt, a house that has stretched your budget may still cause difficulties.

What happens if your tenant doesn’t pay, or leaves without warning? It could be a dream house, but a financial nightmare. You might also worry about paying other home ownership bills – such as maintenance and insurance. Further costs may be added as interest rates rise. You may end up envying your tenants.

Having discipline...and commitment
Alternatively, if you use the rent to turbo-charge your mortgage payments – shrinking your debt more quickly –the strategy might work. Avoid any temptation to use the rental income for other purposes – even if they’re urgent. Set up a separate bank account for the rent received, and make automatic, regular payments from that account to reduce your mortgage debt.

This approach uses the thinking trap of mental accounting to your advantage. Commit to this strategy from the very first rent payment. Don’t put it off and procrastinate - it’s one of the worst things you can do when it comes to financial planning.

Work out your goal
To help you stick to the plan and reduce your mortgage debt, figure out what a manageable level of debt would be. Write that number down. This will be your goal. Then ask your bank to send you automatic alerts to remind you as you progress towards the goal.

Devil in the detail
With renting, situations in different countries can vary widely. The laws can be a real minefield. Often, there are many potentially expensive traps – and unexpected obligations – for landlords. It is really important to do your homework here. You may wish to speak with others about their experiences with renting – although it is easy to fall prey to confirmation bias. Guard against the temptation to give more weight to the stories of those who have made a gain. Seek out and learn from people who have had bad experiences as well. Local citizens advice bureaux and housing charities can help you find your way.

Do all the sums
Your mortgage provider may need to know you want to rent part of the property. This may affect the interest rate charged, taxation, and insurance costs as well as other legal obligations and documentation. It goes without saying that it is important to do your sums carefully. A few small costs can quickly add up.

It sounds like you want tenants for a finite period, maybe a couple of years, rather than a permanent arrangement. Remain fully aware of the risk you are taking. Don’t forget also that house prices fall as well as rise – you can end up with mortgage debts greater than the resale value of your house. Try to avoid feeling the full effect of the winner’s curse of paying over the odds for something you really want, then ending up regretting it.


Ian Bright
Ian Bright

Senior economist at ING
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45 blogs

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