Dilemma regarding rent charge for friend

[Plantyshazfan]

Hello, we have a child with a disability that we bought a flat for (either to live in when he is old enough or to live off the rental income)

The flat is in a desirable area and is lovely. One of our friends has lived in it for nearly 10 years, they would struggle to pay the full rental value so we’ve never charged them that. We have just covered mortgage and management costs.

So, now we know that our son won’t ever live in the flat and our friend is loving living there. We are essentially down financially around £3,000 per year and feel unable to ask them to pay more…. They are a good tenant and friend. What do we do?

We don’t need the money ourselves but obviously we are working hard to ensure that we have enough money for our son to live for the rest of his life too as he won’t be able to work…

AIBU to ask for more rent?

There is no limit on rent rises but the tenant always has the opportunity to take increases to a rent tribunal if they believe it the rise takes it above market rent. After 1st May the same applies apart from a couple of tweaks and rises will be subject to the s13 process and limited to once per year.

Could you go halfway in between? Up it a bit but not full market value? What are the long term plans? Do you think she’d want to live there forever? At some point your son might actually need the money?

How much of the extra £3000 would you lose to tax?

Assuming that you will need every penny you can get to support an adult who will never work, I think you have to maximise your income here. A good friend will understand, as long as you give them a substantial amount of time to adjust.

Unless you really need the money, I would stick with her as a tenant as having someone you don’t know in and also possibly a change in tenant every year or so is a lot more work and cost. Worth it for the stability.

If they are a true friend they will understand that you need to build up a nest egg for your son.
They should recognise the fact that they have benefitted from your considerable generosity for years. Do not feel bad here!

I would raise it every year by about inflation.
It's better to keep it little annually then suddenly realise you have made a loss the last few years and do a big jump.

My observation is that keeping it low and then doing a necessary but large jump causes far more resentment. People don't lookback and say "you've been so kind keeping it low for 5 years and we can see we're still paying low, we understand why you're putting it up." They say " How could you put it up that much. You can't possibly expect us to pay that. It's not fair".

If your son is never going to be able to use this flat, is it financially better to keep it or sell it?
it may be worth visiting an (independent) financial planner as selling the flat and putting the money into shares/investments may be an alternative. I wonder whether it’d be possible to put the property into a trust for your sons future and part of the management of the trust would bee maximising the income as it should be in your sons best interest.

Just explain to your friend the situation. A good friend will understand. Give them six months notice to find somewhere new and promise a glowing reference for them to their next landlord.

It's a tricky one because, as you say, it's a relief having a tenant you know will take care of the property and always pay the rent vs the unknown tenant. I think you need to weigh up which is of more value - peace of mind and the steady income or the risk vs higher financial reward of potentially having to find a new tenant. An option would be to gradually increase the rent year on year, until it is up to or near market value.

Thank you all for your replies,
lots to think about.
We have made an appointment with a financial advisor and we are going to set up a disabled trust for our son. We would never increase the rent by a large amount in one go, but maybe small amounts in line with inflation etc is a good way forward (as well as an honest chat with friend)

as far as im aware the new rules around rent increases - you can only increase the rent by inflation - so if inflation is at 3% then that is the amount you can increase for that year.

If you are charging £600 rent then you can increase £18 per month this year and then if inflation is 3% again next year you'll be able to increase by £18.54

If you don't need the money and they are good tenants them leave it. I'd you make it market value they may leave. You then have the issue of new tenanta and the management of that. They could be very problematic
Just put the rent up gradually each year gently

You should sit down and work out all costs associated with the property. Include everything. Put back a set amount to replace carpets every 6 years, kitchen every 12 years and bathroom every 15 years. I know they might need replacing more frequently depending on how tenants treat the house but ARLA use these frequencies. Get total costs of renting dividends by 12. That is minimum you should charge for rent. You need to increase the rent now. Find out what similar houses are rented out for on Right Move and show the tenant these. As previous poster stated from May 1st you can only increase rent once a year up to full market value but it will be harder for tenants to manage a large increase all at once. This is why I increase each year by inflation but cap at 7 percent. If inflation is 2 percent it increases by 2 percent because my house insurance, boiler insurance, boiler service, gas and electric certificates, and maintenance and repair costs go up each year often by more than inflation. The way I do it is to look at what other houses in same road or area are renting out for, take away £100-150 then that is my base rent. I know if I increase by inflation each year asost LL's do I will always win any rental dispute a tenant might bring as panel look at similar priced houses in the locality and if you are renting at a very similar or lower price you would win any rental price dispute.

In what world is £3000 a year a small amount to people?
Think of what that might potentially do for her son, or what difference 10 years of £3000 a year might do for him if the OP can no longer be as hands on.

TBH, in your situation I'd be looking at selling the flat before May, and investing elsewhere.
In the next few years it's going to be much harder to evict, even to sell the property.
Harder to put rent up.
Costs of repairs are increasing, so what it costs you to maintain now won't be enough to cover it then. Properties getting older means new boiler/ kitchen/ bathroom time.
Landlord licensing is a possibility to come in.
The new rules for EPCs could cost you a fortune, if it's even possible to get the property up to the standard.
Who knows what will happen with capital gains tax?
Making Tax Digital means you're probably going to have to invest in bookkeeping software to complete a self assessment for it.

Honestly, for all of that, I would (and am) sell the property and put it in a S&S ISA.

Could you maybe keep it below market rate, but not by such a big amount? So perhaps 10% below as opposed to 20%? That way they still get a good deal, but you're getting more.

What’s the friend’s plan? To stay there forever?

IME we rarely know how much disposable income people really have. I wouldn't make any assumptions about affordability for your friend. I'd give 2 months' notice of a rent increase that can be very small, e.g. £50pcm. Chat to your friend and explain you're not getting any younger and need to really get cracking on a nest egg for your DC.
I assume you also do everything in writing by the book as well, formally.
Continue this every year so she understands the rent will keep going up.

Inflation has nothing to do with the cost of rent, and 2-3% a year won't touch the sides in real life prices of how costs increase. You're just causing issues for yourself in the future if the mortgage suddenly increases for whatever reason, and you're stuck funding the property that should be paying for your son's future.

I agree with this viewpoint to.

It's not just £3k a year. It's £30k in a decade plus compounding interest that your son is missing out on. Then the next decade and the one after that....

Give generous notice to your friend of rental increases or eviction but you need to manage this property on your son's behalf and to his benefit. Presumably if he can't manage it himself when he is an adult you would be acting as his power of attorney to do so on his behalf and you have an obligation to manage it with his best interests served.

Your tenant has had a good deal for a decade.

You’ve had an absolute dream of a time as a landlord. Your investment is being paid down and you’ve had to make next to no effort: no marketing, no gaps between tenants, no unpaid rent, no cleaning and decorating between tenants.

You have a decision to make and you need to include her in the discussion (1) make an adjustment that she can accomodate (2) sell up and invest the money in stocks or saving account (3) put rent up to full value and lose a friend.
i also have to say that if she was such a good friend she should not be giving you significantly below market rent

Can you not find a happy middle ground?

Chat to friend and say that you need to raise the rent a little, but still will keep it below the market rate, as you appreciate her as a friend.

I had a BTL property and tenants are hit and miss. I had some lovely ones for several years, but then two nightmare tenants in a row who caused thousands of pounds worth of damage each (much more than their deposit) and left me with huge bills, lots of work and lots of stress. I had to replace the carpet every time between tenants because they kept ruining them………… so a good long-term tenant who looks after the property would be worth more than the extra £3k to me (as you could end up spending that on repairs, letting agent fees and time/admin every time the tenants change etc.)

Honestly? It sounds like a giant headache. I’d sell it and put any profits / spare funds into an investment fund for your son. You said you’re seeing a financial advisor, they will be able to help with this.

If the flat is intended to provide assist for your son then you need to be making a profit from it. I have a disabled adult son so I understand your motives. I think you need to have a conversation with your tenant about a regular increase in rent. It doesn’t have to be excessive but enough to build a nest egg for your sons future needs

She must realise that she’s been underpaying and that one day this bubble will burst. She either agrees to the rent increase or moves out, if it’s still below market rents she will probably opt to stay and hopefully realise how lucky she is.

Maybe research rents locally and see how what you’re charging compares

Does the “down £3k” figure account for the tax you’ll
pay on the rent, or is that a gross figure?