Rent a room: an investment case for buying

robmatic

I bought my first property just over a year ago and since then have been letting out my spare room. Knowledgeable moneysavers on here will be aware that the first £4,250 income you receive from doing this is exempt from tax under the 'rent a room' scheme.

The income that I receive from my spare room is more than enough to cover the interest portion of my mortgage. So, one way of looking at it is that I'm getting to live for free in my own property. This is quite a good outcome.

However, this isn't the full picture as deposit requirements being what they are, I paid quite a chunky amount of my own cash over on purchase, and we should take this into account as it would otherwise be earning interest. If we assume that the cost of servicing my mortgage is being met from my regular income (not unreasonable as the mortgage is putting a roof over my head) then the yield from the equity in my property is 7% per year, tax-free.

It strikes me that I would be struggling to get a better return on the equity that I committed. So, 2 questions:

What would be a better investment than buying on this basis?
By how much is my property over-valued if the equity is earning a 7% yield?

(For info, my mortgage is 3.4 times my gross salary, which I understand is reasonable in terms of historic averages).

TruckerT

robmatic wrote: »

By how much is my property over-valued if the equity is earning a 7% yield?

Over-valued by whom?

TruckerT

robmatic

TruckerT wrote: »

Over-valued by whom?

TruckerT

Well, I keep on reading that UK property is too expensive.

Andy_L

However you are having to share your house with someone else - whats the (non-financial) cost of that?

TruckerT

robmatic wrote: »

Well, I keep on reading that UK property is too expensive.

Sorry to be a bore, but too expensive for whom?

You pays your money and you takes your choice...

Lots of people would be unable to bear the prospect of sharing their house with lodgers, but I did it because I had to

Thank god I managed to sell, at a knock-down price, and moved into rental

TruckerT

TruckerT

ps - a more interesting question is why hasn't the £4250 rent-a-room allowance been increased since it was introduced more than a decade ago

robmatic

Andy_L wrote: »

However you are having to share your house with someone else - whats the (non-financial) cost of that?

Fair point, you do lose some of your privacy I guess. Although I also think that there are social benefits to sharing your abode with other people as well.

RenovationMan

robmatic wrote: »

I bought my first property just over a year ago and since then have been letting out my spare room. Knowledgeable moneysavers on here will be aware that the first £4,250 income you receive from doing this is exempt from tax under the 'rent a room' scheme.

The income that I receive from my spare room is more than enough to cover the interest portion of my mortgage. So, one way of looking at it is that I'm getting to live for free in my own property. This is quite a good outcome.

However, this isn't the full picture as deposit requirements being what they are, I paid quite a chunky amount of my own cash over on purchase, and we should take this into account as it would otherwise be earning interest. If we assume that the cost of servicing my mortgage is being met from my regular income (not unreasonable as the mortgage is putting a roof over my head) then the yield from the equity in my property is 7% per year, tax-free.

It strikes me that I would be struggling to get a better return on the equity that I committed. So, 2 questions:

What would be a better investment than buying on this basis?
By how much is my property over-valued if the equity is earning a 7% yield?

(For info, my mortgage is 3.4 times my gross salary, which I understand is reasonable in terms of historic averages).

Don't forget the 50% share of bills, utilities that your lodger pays and the fact that you don't have to put any deposit in a DPS nor do you have to give them security of tenure, so there is no court battle to get them out.

robmatic

TruckerT wrote: »

Sorry to be a bore, but too expensive for whom?

You pays your money and you takes your choice...

Lots of people would be unable to bear the prospect of sharing their house with lodgers, but I did it because I had to

Thank god I managed to sell, at a knock-down price, and moved into rental

TruckerT

The priced out generation? Ownership seems affordable to me, but there is that sacrifice of sharing with others.

RenovationMan

robmatic wrote: »

The priced out generation? Ownership seems affordable to me, but there is that sacrifice of sharing with others.

Not much of a sacrifice if they're your mates.

Two of my pals shared and the arrangement suited them both very well. The one who owned the house travelled a lot and so had someone in the house to deter burglars, etc. plus help with the mortgage and bills. The one who rented a room had a nice home that he had to himself all week and low rental costs that in turn allowed him to save up for a deposit on his own place.

Could not have worked out better for either of them.

TruckerT

robmatic wrote: »

The priced out generation? Ownership seems affordable to me, but there is that sacrifice of sharing with others.

I think we are in general agreement - we do what we have to do

Mums and Dads are beginning a bit of a fight back, and so is the Welfare State

TruckerT