Be careful about chosing friends/flatmates in this business, as there are some real beyaatches out there. I'd stick to a cheap bedsit if I were you.
What she said! Plus, I hate to be boring but if its important to you to stay within the law you would be far better with your own place - two of you sharing is illegal even when you are not there at the same time. As Alexandra said, you will have to schedule your bookings around each other which will drive you mad as someone is guaranteed to lose out - your clients will not want to be running into each other in the corridor/bathroom, no matter how well-organised you are.
I would have a look for a cheap studio or bedsit - if you get really stuck you can also get some very cheap deals on hotel rooms. Apparently some places will even let you book a room just for the day if you are out by a certain time (so they can get the room ready for someone else that night), especially ones near the airports. I've never tried this so I don't know the details but it might be worth looking into, depending on how you want to structure your bookings (doing incalls one or two days a week and outcalls the rest of the time, for example).