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I had a plan, a simple plan. Once I have finalised a divorce and an inheritance I will have enough equity to purchase 2 3 bed houses without needing a mortgage. I would live in one with a lodger and rent the other. It was a good plan, but there may be better options. There would be stuff I needed to know, rules and bureaucracy to understand. I joined PT and read, and read and read some more. I found there are many other options and a lot more rules than anticipated. There were many things I didn't understand... property types, tenancy types, fire regulations, deposit protection, rent guarantee insurance, homecare cover, planning and permitted development, building regulations, energy performance certificates, rent a room scheme, additional stamp duty land tax, capital gains tax, tax deductible expenses, limited companies... I now have an understanding, at various levels and have revised my plan accordingly.
One thing that was immediately clear is that lodgers come with a lot less bureaucracy than tenants and that 2 lodgers provide around the same income as a 3 bed house. 75/80% of my budget puts me in 4/5 bed territory with many more options. I have found 5 bed houses including a self contained unit, e.g. granny annex, in this price bracket, optimally sharing with 3 lodgers. The self contained unit is the interesting part. If I let it I will have a tenant, not a lodger, who will require an AST, deposit protection and minimum EPC of E amongst others and if this is in addition to 3 lodgers I will also require an HMO licence. If I live in it myself I will no longer be a resident landlord, all lodgers would become tenants and I wouldn't be able to use the RAR allowance. However, I can use it as a quiet area if I want time away from lodgers, I can allow family and friends to stay there, I can let it as a short term let, I can use it as a home office and possibly claim expenses separate to the RAR scheme. I now have the possibility of at least the same income from only 75/80% of my budget with less bureaucracy to deal with.
The remaining 20/25% could be used for a renovation or building project, even better if the plot comes with the house. I'm now at a point where I have a vague awareness, rather than an understanding, but I can see that there may also be advantages of doing all this through a limited company - professional advice will be required.
My plan will no doubt adapt from further learning and not least available property, but without PT I would have been satisfied with 2 3 bed houses, a lodger and no mortgage and blissfully unaware of other options. I must focus on issues not related to property for a while, but this seems a good time to thank Vanessa and Nick for providing the site and thank everyone who has contributed for the knowledge I have gained.
Dear Gary,Thank you so much for taking the time to write such a considered, insightful, and generous post! It has ended an already good week on a very high note.Property Tribes is based on the premise that "none of us is as smart as all of us". To hear that PT has opened your eyes to new possibilities and helped you think bigger is at the core of our community philosophy.For what it is worth, Nick and I bought a much bigger house than we needed - 4 bed - and let out two rooms to lodgers to help us afford a bigger and better house. That was 15 years ago and our home has appreciated by around £200K.We generate £1300.00 per month from the lodgers. Earlier this week, I renewed our mortgage deal with Santander, and moved onto a much better rate. The monthly payment dropped from £1250.00 to £570.00 pcm. I think you have a plan and I wish you every success with it.
Praise where its due Vanessa.
Your reply has reminded me of something else learnt, possible most important of all. I have discovered that I am more driven by financial security and freedom than I am by increased wealth. I would have many more options if I were prepared to accept a mortgage.
Being able to take advantage of the wonder of leverage is one of the main benefits of property investment.I understand why people shy away from mortgages, but you should view them as a tool to help you achieve that financial freedom you seek.Even if you took out a low LTV mortgage - say 50% - which is regarded as a low risk LTV - it would greatly enhance what you could achieve, and the speed that you could achieve it imho.
Indeed the lodger strategy is a highly effective one.
However the issues remain that many homeowners continue to be concerned with having strangers in their home and a consequent reluctance to take on lodgers.
This results in there being millions of empty rooms which could substantially assist the housing shortage.
It would massively reduce the need for the commonly loathed HMO.
Most HMO residents would love to be a lodger in a normal home.
Increasing the RFR allowance to say £15000 would be a massive incentive to encourage those reluctant homeowners to let their spare rooms to lodgers.
It could equally enable older people to stay in their big properties whilst at the same time boosting their usually small fixed pension incomes.
It would be a win, win for everyone.
A solicitor can help confirm this, but I think if you make the main entrance to the annex from within the main house, and block up any separate external entrance (or perhaps make it a fire escape only?), it doesn't fall under the tenancy rules, but lodger. Also would be useful if it doesn't have separate council tax, and shares stats supplies with main house (no separate metering), and the mail is delivered to the main house (no separate postal address).
I did read further info a while ago on here https://www.landlordforumproject.co.uk/ but it may take a while to find it. It involved somebody who'd purchased a similar house and hadn't protected a deposit. A car crash legal firm tried to sue the home owner, and they were exploring whether the annex was in fact an annex, so whether deposit protection was in fact not required. It was interesting!
I found the thread, it was a very interesting read, clearly advising a landlord that an annex is not an AST https://www.landlordforumproject.co.uk/landlord-advice-help/tenants-taking-us-to-court/msg18570/#msg18570
However, the same site has another thread clearly advising a tenant that an annex is an AST https://www.landlordforumproject.co.uk/tenant-life/dodgy-tenancy-nosy-and-noisy-landlord/msg17669/#msg17669
I have read the terms "exclusive use" and "liveable unit" used elsewhere to define whether a lodger is a tenant. It seems that once you explore beyond the basic 'live in landlord/lodger renting a room' setup it can be very difficult to distinguish between a lodger and a tenant.
Clearly one of those grey areas then. I always think best to play safe with ASTs.
You (and Vanessa) have had me planning this morning though. My son is off to uni in September and my house is going to be very quiet. I'm now almost certain I'm going to take in a lodger in a spare bedroom. I also have a reception room downstairs which doesn't get used, so I'm going to turn that into a bedroom - and take in another lodger. Upstairs room has an ensuite shower room, and I have a family bathroom downstairs. I'll use the additional tax free income to pay off my mortgage more quickly.
So there you go, as Vanessa said, everyone contributes here - your ramblings have led me to a tax free solution for paying down the mortgage more quickly. Thanks!!
Best of luck Rachel,
Another grey area is bills. If you rent a room, inclusive of bills, the rental price is your taxable income as you can't deduct expenses if using the RAR scheme. If you rent a room exclusive of bills and then share the cost of bills with lodgers it is unclear whether any, some or all of this cost sharing is taxable income.
Another useful guide https://www.ofgem.gov.uk/publications-and-updates/resale-gas-and-electricity-guidance-maximum-resale-price-updated-october-2005
Lodgers always pay an inclusive rent
You cannot charge extra for other services.
That is if you wish to remain within the RFR process.
Lodgers are responsible for their own food, laundry, personal administration etc.
The LL is responsible for providing all normal household consumables.
This is includes things like toilet rolls.
The whole point of a lodger is that they share all the conveniences of a normal home paying for it all within a rent.
So you can't charge for electricity or gas etc.
In practice many live in LL end up doing laundry etc on a particular day etc.
It tends to be that the lodgers become part of the family etc.
A live in LL with lodgers is not running a B & B.
As soon as a LL starts to move away from charging an all inclusive rent and charging extras you enter grey areas.
If you choose to have lodgers but charge more than the RFR allowance then you enter a different tax regime.
I would suspect though I could never prove it than many live in LL exceed the RFR allowance but don't declare it!!!!
Personally I believe that the RFR allowance should be abolished in its entirety.
The new tax regime should be that providing the property is your PPR that you can earn as much as you can or wish from lodgers tax free.
No tax offsets would be allowed.
Lodger rooms would then be priced in accordance with local markets.
I'm sure that many LL with lodgers exceed the RFR allowance and just don't declare it.
There is simply no way HMRC could ever find out.
So just to encourage homeowners to let out rooms then making ALL lodger income tax free would encourage many timid homeowners to take the plunge and throw open their doors to lodgers.
Lodgers can stay for as long or as little as the LL requires.
So such lodging situations would be ideal to replace the Air B&B business model.
Tenants would only be allowed to take in lodgers with the express permission of the LL which may be REFUSED.
It becomes problematic when you may have a tenant in receipt of HB as lodger income should be factored into their benefit entitlement.
ONLY council tenants should be denied tax free lodger income.
The main issue here though is how to encourage all those homeowners who don't take lodgers currently to do so.
Tax free income of ANY is the carrot.
It would drastically reduce the need for HMO which would be no bad thing.
HMO are a blight on the property market.
There are more than enough empty rooms that given the right tax incentive many homeowners would take in lodgers to occupy.
Govt just has to be brave
It could address significantly a major part of the housing crisis.
Even so many homeowners would still be reluctant to take on lodgers no matter how much they could earn.
Privacy is something that people effectively by not having lodgers are paying a high price for.
That is their choice.
Some things are more important than income!
But totally tax free lodger income could be the final encouragement for many homeowners to sacrifice their privacy.
Paul, I disagree that lodgers always pay an inclusive rent, I often see rooms advertised as rent plus bills, personally I rent inclusive.
From the Rent a Room guidelines
Council tax must be included in the rent, but it is legitimate to make an additional charge for utilities. It is clear that income tax is payable on rent but the resale of utilities is not rent and must not generate profit, but can be charged separately.