Rent a room: an investment case for buying

Thrugelmir

robmatic wrote: »

The priced out generation? Ownership seems affordable to me,

Depends entirely on household income and location.

robmatic

Thrugelmir wrote: »

Depends entirely on household income and location.

Clearly. Although it stacks up quite well for me in a city which I believe has low rental yields for landlords.

JonnyBravo

Rob, it's clearly working for you but just not really indicative of anything.
How about you rent out another room and make a 10% yield? Would that "show" anything?

IronWolf

7% yield I would say is quite fair. But it's not that hard to match at the moment in the stock market from dividends alone, and far more capital gain upside. But it takes a lot more know how to invest in stocks over property.

chewmylegoff

RenovationMan wrote: »

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.

just to point out that any contribution your lodger pays you towards the bills should be treated as rent under the rent a room scheme, so you can't charge then £4,250 for rent and then another £500 for bills but pay no tax on the £500.

obviously if you just get them to pay some of the bills directly then you're probably ok. but then you might not really want this to happen as they might not pay the bills.

there is also the risk that said lodger turns out to be a right [EMAIL="tw@t"]!!!!!![/EMAIL].

RenovationMan

chewmylegoff wrote: »

just to point out that any contribution your lodger pays you towards the bills should be treated as rent under the rent a room scheme, so you can't charge then £4,250 for rent and then another £500 for bills but pay no tax on the £500.

obviously if you just get them to pay some of the bills directly then you're probably ok. but then you might not really want this to happen as they might not pay the bills.

there is also the risk that said lodger turns out to be a right !!!!!!.

Are you sure about this? I don't see why gas, electricity & phone has to from part of the rent a room income seeing as there is no profit for the home owner, they are just additional expenses on top of the rent. The home owner has no income from utility bills payments and so it should not fall into the rent-a-room tax free allowance. Surely?

the_flying_pig

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).

That's really a lot to unpick in that question. In particular the bit about yield on equity is very hard to follow.

I'd agree that 'rent a room' is potentially useful. It can basically, for the short term [i.e. whilst interest rates are low] give you a cheap houseshare.

chewmylegoff

RenovationMan wrote: »

Are you sure about this? I don't see why gas, electricity & phone has to from part of the rent a room income seeing as there is no profit for the home owner, they are just additional expenses on top of the rent. The home owner has no income from utility bills payments and so it should not fall into the rent-a-room tax free allowance. Surely?

yes, i am sure about it. the whole point about receiving the tax free allowance is that it is supposed to make things simpler for you i.e. you don't have to file a tax return which declares the gross income and then all the deductions (including, e.g. additional light and heat costs).

you can opt out of the scheme if you want to, and deduct all your costs instead.

RenovationMan

chewmylegoff wrote: »

yes, i am sure about it. the whole point about receiving the tax free allowance is that it is supposed to make things simpler for you i.e. you don't have to file a tax return which declares the gross income and then all the deductions (including, e.g. additional light and heat costs).

you can opt out of the scheme if you want to, and deduct all your costs instead.

Just checked this out: http://www.which.co.uk/money/tax/guides/tax-on-property-and-rental-income/rent-a-room-letting-a-room-in-your-home/

It confirms what you said, so thanks for the info. I'm not considering this, but it's good to know all the facts in case anyone asks in the future.