The Joint Equity guide to renting a room (part 1 - setting the rent)

Lots of first time buyers (and some second time buyers, me included) have rented out a room in their homes in order to help with mortgage payments and bills.

I have to say, it's a good plan, but you should take a few careful steps to make sure you get the right lodger, and that your relationship with them runs smoothly. Trust me, it can be a minefield, and I learnt the hard way!

By the way - this guide assumes that your mortgage or lease allows you to rent out a room in the property. Some mortgages and leases do preclude sub-letting, although under The Joint Equity Scheme you can rent part of your home to a lodger.

In this series of blog posts, I address the following topics:

1. Setting the rent
2. Advertising the room
3. Preparing the room (and the rest of your home)
   
4. Holding viewings and interviews
5. Taking deposits
6. Signing tenancy agreements
7. Setting ground rules
8. Dealing with bills (and other stuff)
   
9. What happens when they move out

Today, we're Setting The Rent:

This sounds really easy, and a lot of it is common sense, but there are a few things here that you may not yet have considered.

• Do your research

Find out what the going rate is for a room in your area. Check newsagent's windows, your local papers, Gumtree, Loot, Spareroom.co.uk and even Facebook are good places to check out.

When you are doing your research, bear in mind that rents can be influenced by the size or the room, the standard of the property, the location, proximity to the town centre, transport links, how many other people there are to share with, availability of a garden, etc. However, you should be able to figure out that double rooms have one price range, and single rooms have another. You should aim to pick a price within the general range for your room type, that reflects the advantages (or disadvantages) of your property.

• Go inclusive?

When you are doing your price research, notice the difference between 'including bills' rentals and those 'excluding bills'.

I am a firm advocate of inclusive of bills rentals (this typically means all bills except telephone). The reason that I'm so keen on including bills is that it allows your lodger to clearly see what they are due to pay, and stops you having to divide the bills every month, chase your lodger for their share, and prevents underpayment & all it's attendant arguments.

• Beware the tax implications

The Government has a 'rent a room' scheme, which allows you to rent out a room in your only or main residence and receive up to £4,250 annually without paying tax on the income. This means that you could charge up to £354pcm, if the room is occupied for a whole year, without paying tax.

There are advantages and disadvantages to this scheme, which are detailed in the Revenue & Custom's page on the scheme, but the most important thing to bear in mind is that this figure for total gross income (i.e. if you include bills in the rent, that will be taken off this figure).

Of course, you don't have to use the rent a room scheme, and the tax implications of the alternatives are detailed here.

• Consider the costs of high rents
  

Going for a high rent might look like the best way to make money, but if you're pricing too high for your area, this strategy could actually cost you money.

Slightly cheaper rooms will rent out more quickly, so choose your price bearing in mind what the cost to you would be if you don't get a lodger for a month or more.

E.g. Rent £500pcm and it takes you 2 months to find a lodger, who then takes out a 1 year's agreement (14 months in total). You would receive £6,000 over the whole 14 month period.

However, if you drop your rent to £450pcm and rent it straight away to a tenant who takes out a year's agreement (assuming they appreciate the more reasonable rent and don't leave after 1 year), you would receive £6,300 over the whole 14 months - AND you wouldn't have had to wait 2 months before getting any income.

• Pick and stick
  

Finally, when you decide what you want to rent the room out for, stick to your price. If you allow yourself to be haggled down in price, you are likely to end up feeling resentful towards your lodger and that can lead to bad feeling between you. Not a good recipe for happy co-habitation.

This is why it's particularly important to get your price right in the first place.



Okay - that's all for now. On Monday, I'll be looking at advertising the room, including what to say and where to advertise for free.

Take care,

Tam