Make money from your house

Board and lodgings – it sounds like a phrase straight out of Victorian times but in fact the concept is still going strong.

According to recent research from Abbey, the number of homeowners renting out a spare room has soared by 152% in the past 12 months – from 388,000 to 981,000 – in a bid to stave off the recession. This means that 3% of all homeowners in the UK now have at least one lodger.

Average rent generated from a spare room is currently £393 a month, according to Abbey – which translates into a very useful £4,716 extra income each year.
 
But the benefits don't stop there. Under the government's Rent a Room scheme, which is designed to encourage the use of existing accommodation, you can earn up to £4,250 in rental income each year completely tax-free.
 
Nici Audhlam-Gardiner, director of Abbey mortgages, says: "If you have a spare room that's just gathering dust, not only will you have some extra money each month by renting it out, but most of it could be tax-free too."

You don't have to be a homeowner to take advantage of the Rent a Room scheme – although if you are renting a property, you will have to check your tenancy agreement to make sure you're allowed to sub-let a room.

And, whether rented or owned, the home will have to be fully furnished and used as your only or main residence.

Also bear in mind that you won't then be able to offset any expenses against tax, such as the cost of the lodger's furniture or their part of the heating and lighting.

The logistics

So, if you're keen on the idea of taking in a lodger, where should you start and what do you need to think about before tracking down a prospective tenant?

While the average rent may be just shy of £400 a month, it varies dramatically according to where you live in the UK, the size and state of your property, and the room itself – such as whether it comes with an en-suite bathroom.

However, you will also need to consider what expenses to incorporate in the cost of your rent – will it include bills, broadband and telephone, for example?
 
Matt Hutchinson, spokesperson for spareroom.co.uk, a website that matches lodgers with suitable rooms to rent, says a room that includes all bills tends to add around £75 a month onto the cost, but he adds that this will also depend on the circumstances.
 
He explains: "If a single person lets a room, for example, they'll lose their single occupancy discount on council tax, so they'll need to factor that cost in too."
 
At least these days finding a lodger doesn't mean limiting an advert to 20 words and waiting for the next print run of the local newspaper. Instead, there are a whole host of websites that, rather like online dating services, match together profiles of homeowners and lodgers.

As well as myspareroom.co.uk, check out roombuddies.com, easyroommate.co.uk and gumtree.com.
 
But bear in mind that, while you may be able to advertise your room for free, some sites will charge you for contacting a potential applicant.

Remember too that lodgers don't have to be full-time fixtures in your home. Websites such as mondaytofriday.com put landlords in touch with lodgers who are only looking for somewhere to rest their heads during the working week.

Director of the site, Judy Niner, says: "It's the perfect arrangement for landlords looking to generate some tax-free income but who want to keep their home as their own."

Because of the absence of your lodger at weekends, Niner recommends charging "between four-and five-sevenths" of full-time lodging costs. "If it's any more expensive than this, you simply won't be able to rent the room," she says.

If you live near a college or university you could also consider renting a room to a student during term time. In this case, contact the local university and ask about the best means of advertising. It could be through the student union or on the university's website.

Allow plenty of time before the start of the new term to put up your advert, as competition could be tough.

Who's in your home?

But how can you make sure you'll find a lodger who you'll get on with and can trust? "Many people are naturally somewhat wary of inviting a stranger to live in their home but, if you do your homework first, it can work extremely well," says Hutchinson.
 
So what exactly does this homework entail? It's a good idea to start with a basic application form. This can be downloaded for free from websites such as landlordzone.co.uk.
 
"This form will detail things like an applicant's current employment, previous address and any vehicle they will be keeping at the property," says managing director of the site, Tom Entwistle. "It also requires proof of identity such as a passport or driving licence."

When you are comfortable that your lodger is who they say they are, it's time to find out if they are reliable payers. Once you have their signed permission – which can also be obtained from the application form – you can run an online credit search against their name.
 
A basic check from online service tenantverify.co.uk, at a cost of £15.88, will reveal an individual's credit score, outstanding debts, whether there are any County Court judgements filed against them and their places of residence over the last six years.

Make sure you also ask for at least two references from any prospective tenant, ideally from a previous landlord and current employer.

The nitty gritty

Once you've done this it's still crucial to set down the deal in writing – in terms of both what is included for the rent and what is expected of the arrangement.
 
"We'd advise you to be as clear as you can be from the outset to avoid any future misunderstandings," says Hutchinson. You can do this with a straightforward lodger agreement or house share agreement, available either online from landlordzone.co.uk or from a legal publisher such as LawPack.
 
This contract is slightly different to the assured shorthold tenancy agreement used by 'remote' buy-to-let landlords as it does not include a security of tenure. In other words, the lodger has no legal right to stay in your home.

However, the law does state that live-in landlords should provide a 'reasonable notice period'. This is usually interpreted as 30 days but is fundamentally contractual.

So, as long as the stated time period has been agreed by both parties, it will not be over-ruled by statutory law – even in the highly unlikely event that things get as far as ending up in a courtroom.

Bear in mind that notice periods can work both for and against you. For example, if you and your lodger experience a catastrophic clash of personalities – yet you have stated a months' notice to ensure you can pay the mortgage – they have every right to stay for that period.
 
It is also wise to insist that the agreed rent is paid by direct debit. "Dealing with money can put a strain on any relationship," warns Hutchinson, "so it's a lot easier to get the rent paid automatically than to have to ask for it over the breakfast table."
 
It's common practice to take a deposit from a lodger to protect against damage and breakages – one month's rent is typical. As you are not using an assured shorthold tenancy agreement, the funds won't have to be held in the government-backed tenancy deposit protection scheme.

Still, it's wise to keep the funds in a separate account that you don't touch and to provide your lodger with a signed receipt.

Insurance

Lastly, you need to inform your household insurer that there will be another full-time person living within your home.
 
"It may not even result in higher premiums but extras like accidental damage cover may not be valid for additional household residents," explains Malcolm Tarling, spokesperson for the Association of British Insurers.

Though your lodger will not need to worry about buildings insurance – after all it's your bricks and mortar – they will need to take out their own separate contents cover if they want their belongings protected against damage or burglary.

What have you missed?

Even with the most watertight contract in the world, some lifestyle habits will only rear their head once your lodger has actually moved in. So here are some finer points to discuss:

Food: It would be unusual to share the entire contents of the fridge with your lodger but what about staple items like milk and bread? Agree on a policy upfront to avoid annoyance and frustration.

Cleaning: Unless you have a cleaner, make sure you both know who is responsible for cleaning, how often and for which rooms.

Access to rooms: Find out if your lodger minds if you go into their room, even if it's to shut a window or put a pile of washing on their bed – and vice versa.

Guests: This can be a real sticking point and one that is crucial to get straight from the start. If your lodger has a partner, can they stay overnight – and how many times in a week? You don't want to charge for one lodger and end up with two.

In and out times: Set down expectations around what time your lodger can come in at night. This will depend on the kind of sleeper you are and how comfortable you are with comings and goings in the wee hours.

Time away from the house: If your lodger takes a month sabbatical, will they still expect to pay the rent? People have different ideas about the same thing so find out from the offset.

Bathrooms: If you are sharing a bathroom, organise a rough schedule from the start. If you are all working, you don't want to find that your lodger has a bath between 8am and 9am every day.