Room for Rent – How Your Spare Room Could Make You Money

If you’re looking for a little extra income and you don’t mind sharing your home, letting out a room could be a great solution. You could potentially make up to £4,250 from letting out a spare room and what’s more, it’s tax free!

The Government’s Rent-a-Room scheme offers some really great tax advantages and makes it easier to take on tenants. Our guide tells you how to find the right tenant and the type of agreement you should make to ensure everything goes to plan.

Who can let a room out?

Anybody owning a property in the UK who uses it as their primary residence can rent to a tenant under the Rent-a-Room initiative. If you rent your property you may also be eligible depending on the terms of your lease. If you have a mortgage you should check with your lender and home insurance company to ensure you are not contravening any terms or conditions.

What are the advantages and disadvantages of letting out a room?

Of course, the main advantage to letting out a room in your home is money! When you let out a room you do not have to declare the income so long as the total doesn’t exceed £4,250 a year. This means you don’t have to worry about offsetting things such as accountancy services, bills, expenses, or cleaning services against your income.

However, the disadvantages of the Rent-a-Room scheme are also financial. For example, you cannot claim any expenses against the income you receive through the letting. Also, if you receive more than £4,250 per year on total (you may also be charging for meals and laundry services) you will have to declare the additional amount and pay the relevant amount of tax.

Would the scheme work for you?

Before you start advertising a room for rent it’s a good idea to sit down with a piece of paper and work out if the scheme is right for you. Think about how much you are likely to get in rent. You can look around local listings to find out how much the local rent rates are. Also, think about the additional expenses you may incur such as additional charges on your buildings and contents insurance, accountancy fees, and letting agents’ fees if you use one. You utility bills will also increase and you may have to pay for advertising the room. All of these expenses will be deducted from your total income so it is worth working out how much profit you could potentially make before you start.

If your likely income from renting out your room is likely to be in the region of £4,250 with little in the way of expenses then the scheme is a safe bet. If however, your expenses are more likely to be thousands of pounds then you would probably be best to declare the income and pay tax normally.

Finding the Right Tenant

Another VERY important consideration is the tenant. You are going to be sharing your house with a stranger. How does that sit with you? If you are happy to share your kitchen, bathroom and living space with a stranger then you’re ready to proceed. If not, then perhaps it may not be for you unless you can find a friend who needs a room to rent.

Finding a tenant should be pretty easy as there is a big call for rented rooms right now. Advertise in your local paper or on free local listings online. You could also use a letting agent although this will incur a fee.  A tenancy agreement should be drawn up also and you can find templates online or ask your letting agent for assistance with this.

If you have a room in your home that you simply don’t use and that is suitable for letting then this is a great way of making a little extra income.  More and more people in the UK are looking to rent so you should be able to find a suitable tenant very quickly.

How to Evict the Tenant from Hell

A couple of weeks ago we published an article on how to avoid the tenant from hell, but what if they have already infiltrated your defences?  They may have passed all the credit checks, ticked all the right boxes, paid rent on time and shown all the signs of being the model tenant only for problems to suddenly occur.  Whether you are having problems with rent being paid or damage being made to your property there are procedures you can follow to evict a tenant if things have gone too far.

Keep Communication Lines Open

Communication is the key issue when problems occur between tenant and landlord and it’s important that you make your intentions clear from the outset.  If your tenant has fallen behind with the rent or is refusing to pay then you have every right to protect your rental income and investigate legal proceedings if necessary.  The good news is many problems such as this can be resolved by finding out what the issue is.  If your tenant has fallen behind the rent because of a certain misfortune you can give them a date by which they need to come good with the rent giving them a little leeway.  After all, it’s going to be a lot more hassle to find another tenant than wait a couple of weeks for the rent that is due.

If your rental property is mortgaged then you may have an obligation with your lender to keep your rental income above a certain level.  If you have no choice, but to start the eviction process then you need to check that certain procedures are followed.

Before you begin the eviction process you must ensure that both yourself and your tenant has a signed copy of the tenancy agreement and that you are confident of the rent schedule.  You should also check that the rental deposit is protected sufficiently and that there are no disrepair issues with the property in question.

Issuing the Paperwork

If your tenant is more than 2 weeks behind with the rent then it’s time to serve a Section 8 notice.  This notice must be responded positively within two weeks of receipt and if the tenant has not done so you should begin legal proceedings immediately.  It can take anything up to 8 weeks for a court order to be issued.

Before you process your claim you should ensure you have all the relevant paperwork and evidence available.  If there are any errors or false claims these will be brought to light at the hearing and could result in a second hearing or a dismissed claim.

Problems with Legally Evicting a Tenant

Of course, in our democratic society, tenants always have the right to defending their position.  The court will send your tenant a copy of your claim to the tenant advising them strongly to seek legal advice.  Free help is available to tenants from Shelter, solicitors, the Citizens Advice Bureau and also their local housing authority and there are also a number of specialist Government websites offering advice to tenants facing eviction.  There is a severe shortage of council and social housing available in the UK right now and these organisations will do all they can to ensure tenants can remain in their rented accommodation.

However, the law is the law and you as a landlord have a right to evict a tenant who has breached their agreement or is refusing to or simply cannot pay their rent.  As long as you ensure you communicate with your tenant and attempt to resolve any difficulties you may be able to avoid the long and arduous process of tenant eviction.

Ten Tips for New Landlords

1. Take safety very seriously.

Landlords have obligations under law to keep tenants safe in relation to gas (carbon monoxide), electricity and fire. By law you MUST have an annual, valid gas safety certificate at ALL TIMES. There is no legal requirement to have an electrical certificate, but the only real way to prove the electrics are safe is a certificate, so sensible landlords get one every 3-5 years. All furniture and furnishing must show a fire safety label, if it doesn’t, it’s illegal, and you need to remove it. It is also good practice to install smoke/heat detectors and a carbon monoxide alarm. We all deserve to be safe in our homes.

2. Reference your tenants & get a deposit & guarantor

Having non-paying tenants in your property means no income, and it may continue for several months. It is a landlord’s worst nightmare, but unlikely if you take the right steps. To significantly reduce the chances of problems, reference your tenants (e.g. RLA Tenant Referencing), get several applicants and choose the best – don’t just take the first one that comes along. Take a deposit (it needs registering by law in a deposit scheme (see the Government rules).

You should also get a guarantor (e.g. a parent or relative) to agree to pay the rent if the tenant doesn’t (most tenants are agreeable to this). If you take tenants on benefits, get the benefits paid into a credit union account if you can.

3. Look after the property

Before the tenants move in, take copious photographs, with dates on them – floor, walls, appliances, ceilings, doors, and windows. Print them off and get the tenant to sign each one, so they agree that is the current condition of the property. If they do damage the property, this is clear evidence which will help you retain some or all of their deposit. During the tenancy, visit to inspect the property every three months and inform the tenant of any improvements they need to make (you need to give the tenant advance written notice of visits).

4. Tell your lender & freeholder

If you don’t tell your mortgage lender you are renting the property out, you are likely to be in breach of your mortgage conditions, which may invalidate your insurance. The best policy is to inform your lender. Most are agreeable to homes being converted to buy to let properties. If the property is a leasehold property (i.e. a flat), you should also write to the freeholder and give them the tenant’s name and contact details in case of emergency (some, councils especially, may charge for updating their records).

5. Use a written tenancy agreement

Don’t even think about letting a property without a written tenancy agreement. You can buy one online (Assured Shorthold Tenancy Agreement Template) or in some stationers like WH Smith.  A written agreement makes the details of the tenancy very clear in case of problems, and will be required in case of any court action. Letting property on verbal agreements is asking for trouble. Ideally the tenancy agreement will be signed AND witnessed. Remember to keep it safe, and scan a copy.

6. Get an Energy Performance Certificate

As of October 2008, an EPC has to be shown to a tenant BEFORE they move into a property, by law. An EPC is a grading of the property’s energy efficiency. They cost about £75, and last for ten years. Getting one is easy, and contains advice to improve the efficiency of a property. It’s advisable to replace all light bulbs with energy saving bulbs before the EPC assessor visits. Not showing the EPC to the tenant prior to them moving in may result in a fine from Trading Standards.

Get an online Energy Performance Certificate quote.

7. If tenants stop paying, act fast

When a tenant stops paying, many landlords freeze, and simply hope the tenant will pay up. Before you know it, several months have passed, and the arrears put your own financial situation at risk. To avoid this, watch rent payments like a hawk, as soon as one is late, call and write to the tenant to request payment. As soon as they miss a second monthly payment, you should issue formal eviction notices (which usually encourages tenants to pay, but if not lays the groundwork for the eviction). The eviction process is not straightforward and it’s advisable to get help from someone like Landlord Action  as soon as a tenant misses that second monthly payment. Typically an eviction (including legal and court fees) costs £700 and takes 3-6months – the quicker you get on it, the smaller the problem. Always be understanding, but also be firm.

8. Check you are insured

Many home insurance policies are invalid if a property is rented out, so check with your insurer. You also need to inform your buildings insurance provider (or freeholder if they arrange it on your behalf). If your property burns down and you are not insured, it could destroy your financial foundations, so check it. You should also get public liability insurance, so if someone is hurt in or near the building, you are likely to be covered. Insurance is boring…. unless you need to make a claim.

Get an online Landlord Insurance Quote from Melville Burbage and get online prices with a High Street Service.

9. Pick a good agent (or get trained)

Letting agents are unregulated, and sadly some are unscrupulous and will impose what some consider unreasonable charges on tenant or landlord or both, often when it’s too late to refuse. It is invariably best to use an agent who is a member of the Association of Residential Letting Agents (ARLA) as they have high standards, and agents need to be formally trained. Ask them what their fees are, including tenancy set-up fees, management fees, renewal fees, and what they charge tenants – get it in writing. If you do not use an agent, don’t DIY without some training – landlord associations and ARLA do training, as do many local councils (as part of their accreditation schemes). Property law is extensive – don’t get burnt, get trained. 10. Join a landlord association The largest UK landlord association is the National Landlord Association, which provides a regular magazine, many member benefits, a telephone helpline, and an annual conference. Membership is low cost and well worth it. The second largest UK landlord organisation is the Residential Landlords Association which offers similar benefits. Joining one gives you an insight into what a professional landlord needs to know to protect his or her finances and reduce risk of problems.

About the Author

Ollie Cornes is an experienced, professional landlord and entrepreneur. In 2002 he founded (and later sold) the Singing Pig property forum. He owns a multi-million pound portfolio of properties in and around London, and is qualified with the Association of Residential Letting Agents. His business, Juicy Property, provides online property management software and related services to landlords.