Debt payoff strategy: Renting out a spare room

By Marianne Curphey

If you're struggling with credit card debt or are behind on bills, renting a spare room out to a lodger might seem like an easy fix. In fact, according to statistics from house-share website Spareroom.co.uk, a growing number of Britons are taking in lodgers in a tough economy. January 2012 alone saw 6,000 new landlords renting out spare rooms in the UK.

Yet, while a monthly rent cheque may cover their credit card bills, homeowners need to be sure that they're protecting themselves and their property. Here are 6 tips from rental experts for first-time landlords:

1.) Get things in writing.
"The first tip is to always have something in writing, as it protects both you and your lodger," says Matt Hutchinson, a director of Spareroom.co.uk. tips-for-landlords

Even if you're renting to a friend, drawing up a contract can help guide you through disagreements down the line.

"As a bare minimum it should cover the rent, when it's due, what deposit you'll take and what the notice period is," Hutchinson says. "This should all be covered and signed before the lodger moves in."

Be clear whether bills are included, such as utilities and council tax, says David Salusbury, Chairman of the National Landlords Association (NLA). And be clear about what both parties need to do in order to terminate the agreement (including what notice, if any, either party needs to give).

2.) Do a background check.
Check the background of your lodger and ask for references (from previous landlords or an employer).

 "Don't just rely on these type of checks though," says Hutchinson. "Meet your prospective lodger more than once if you can and trust your instincts. After all, it's not just about whether they pay the rent on time or not -- you'll be living with them."

Salusbury suggests using a professional referencing service or at least asking for identification (passport or driving license), proof of earnings and, if the tenant is not a UK citizen, proof of his or her right to live and work in the UK.

3.) Sort out the tax situation.
The rent you receive is income and can therefore be taxed. .According to Salusbury, live-in landlords can take advantage of the government's rent-a-room scheme, which stipulates that the first £4,250 of income generated from a lodger per year is tax free. To qualify for this, the room you offer must be furnished.

Also, keep the council tax in mind. If you are currently living alone, you are entitled to a single-person tax discount of 25%. If you take in a lodger, you are no longer eligible for that discount.

4.) Make sure you have enough insurance.
Most buildings' insurance, according to Salusbury, will require an additional premium if you rent a room to a lodger. Also, remember that your lodger will likely be bringing belongings into your home. You'll have to pay extra to have your lodger's belongings covered under your own contents insurance. Or, you'll have to inform lodgers that they must take out their own contents insurance.

In addition to informing your insurance company, be sure to inform your mortgage lender that you're considering taking in a lodger - and ask about its requirements.

5.) Know what you'll have to do to get rid of a lodger.
"The law recognises that live in landlords are more vulnerable [than traditional landlords], as they share their home with their lodger," Hutchinson says. "As a result, it's easier to get rid of a lodger than a tenant. If you simply want them to leave, you can just give notice."

In your lodger agreement, spell out how much advance notice you plan to give if you want to lodger to leave. The standard, according to Hutchinson, is four weeks.

When you want your lodger to leave, give notice in writing as well as verbally to cover yourself.

"If you have to evict a lodger who refuses to leave you will need a court order," Salusbury says.

6.) Protect your tenant - and yourself.
To ensure your property is safe, have any gas appliances checked by someone on the Gas Safe Register.

"This is a simple and relatively inexpensive procedure," Hutchinson says.

Because renters might damage your property, ask for a deposit upon move-in to cover any repairs. It's also a good idea to create an inventory and inspect your home's current condition with the tenant. That way, you can document the condition of your home before the tenant moves in, compare it with the condition after the tenant moves out, and deduct the necessary amount from the deposit.

See related: Debt payoff strategy: Selling your stuff, Fall in household debt no cause for celebration

Published: 30 March 2012