Advice on helping a friend with property investment

Thefrenchman123

Section62 said:

Thefrenchman123 said:

So, stupid idea? Just trying to help out a friend in a way which is not idiotic for me but which also doesn't make her feel like it's charity.

Have a read of the comments on this thread -
https://forums.moneysavingexpert.com/discussion/6597082/should-my-partner-be-charging-me-rent/p1

If your first though is "my situation is completely different to this", then you'll know the idea you've had is not a good one.

The situation is different in the sense you aren't proposing to live together, and presumably won't have the 'fringe benefits' either.  But the core of that situation is similar to yours - one person who can afford to provide cheap/subsidised housing to another person with whom they have a friendship/relationship.

If you make a profit from the deal then you are doing so on the back of a friend. If you adjust things so your only profit is from uplift in the value of the property then your profit will be at the expense of her ever being able to own her home outright.  Essentially anything other than 'charity' - providing her housing at zero gain to yourself - has the potential to put a strain on your relationship, and jointly owning a property you have a strained relationship with is not fun.

You also need to consider all the scenarios.  If you were to die, would your children want to continue the investment in this property - or would they want to cash in to use the money for their own needs?  If you protect your friend's position then you potentially disadvantage your own children.

The main reason for linking to the thread above is not for the detail of the situation, but rather the kind of responses given by other forum members to the situation.  Think about the responses you might get if you post back here in a year or two saying the deal has gone bad and you want to either charge your friend more, or you want to get her out of the house to sell it.  As an investment it is possibly one of the worst things you could do.

Thanks for this. In terms of whether I will die, I'm pretty sure I will   but said in the OP that this would be a long term investment for the benefit of my children if the house were not sold in my lifetime. As for making a profit, it's the same return (actually slightly less) than would be available to her under a traditional shared ownership scheme, so don't see it as making it 'on the back of a friend' - yes I'd get a modest return but she would be in a slightly better position than going the traditional SO route so I wouldn't be taking advantage in any way (and she can't find SO properties anyway). 

The responses I was hoping for were more along the lines of "if she stops paying rent you can put this into the tenants in common agreement that it comes off the eventual sale, or you're then entitled to force a sale" etc. 

The earlier response about SLDT charge though was one I hadn't considered and probably makes it worth detailed calculations. CGT is what it is and would be the same if I did a buy to let, so not really a consideration.

Thefrenchman123

FlorayG said:

I have a friend in a "I'll help you out" mess.
She had a big mortgage so when she sold to move areas she couldn't afford to buy outright and couldn't get any mortgage due to age and employment status, so she and a friend of hers bought the current house between them. Because he mortgaged his share, only his name could go on the deeds and mortgage so effectively he owns the house even though she paid for half of it. She pays no rent. What is her legal situation? Nobody is quite sure...don't end up in that sort of mess.  I think you won't be able to get a joint mortgage on that property nor two separate ones

Thanks - my contribution is from cash so no mortgage required. Because I'd be on the deeds I understand the mortgage would need to be in joint names though (I'm mortgage free so not an issue on logistical grounds, but there may well be legal ramifications I haven't thought about).

Appreciate the real life example - thanks.

Debbie9009

Some practical considerations 

what happens if you fall out for any reason, would you want to continue the arrangement, would they ? and if neither of you do, how are you going to resolve that, friend buying you out if they can, or house being sold ? Probably easier to discuss this now so you have some idea of what you would do, but of course they/you may change their/your minds.

what happens if they want to buy you out at some point ? Would you do this on the value the house was purchased for, or the value at the time they want to buy you out.

what happens if they die, who will inherit the part they own ? Will they then want to sell ? Would you want to buy them out if you were in a position to do so ?

what happens if one or both of you end up in financial difficulties, if they can’t afford to keep paying how would you handle that ? And if you suddenly needed the money back, how will that work ? And whilst you may be in a great financial position right now, things can and do change, I say this from personal experience.

Personally I would start with seeing if you can even get a mortgage on this basis, and then consider everything else, as like others I suspect it might be difficult to find a mortgage for this situation.

Section62

Thefrenchman123 said:

Thanks for this. In terms of whether I will die, I'm pretty sure I will   but said in the OP that this would be a long term investment for the benefit of my children if the house were not sold in my lifetime.

I was trying to be tactful, but for clarity meant "If you died (say) the day after completion on the property". Your executors and family will then have difficult decisions to make.  The extent of the problem depends on the ages of your children and how they are set up already - for example if they could afford to keep (as share of) this property as an investment, or if they need funding for university and a deposit on their own first home. (see below).

Thefrenchman123 said:

As for making a profit, it's the same return (actually slightly less) than would be available to her under a traditional shared ownership scheme, so don't see it as making it 'on the back of a friend' - yes I'd get a modest return but she would be in a slightly better position than going the traditional SO route so I wouldn't be taking advantage in any way (and she can't find SO properties anyway).

In your position I'd be considering doing the same thing, so my 'on the back of a friend' comment isn't how I'd see it, but rather what I think others might see it as.  Ultimately, if things go wrong with the plan, you might find yourself in a courtroom asking a judge to allow you to evict your friend, or give you some other form of financial restitution.  This is where people's perceptions come into the equation... no matter how neutral the judge, they may well wonder "what was in it for him", and then base their judgement on you approaching this arrangement as a quasi-commercial one and thus implicitly accepting risk of financial loss.

Thefrenchman123 said:

The responses I was hoping for were more along the lines of "if she stops paying rent you can put this into the tenants in common agreement that it comes off the eventual sale, or you're then entitled to force a sale" etc.

I think you need professional legal advice TBH.  The forum is Ok for general advice and people sharing moral judgements, but your need goes beyond that - you need someone with an understanding of the details of your life (e.g. see above regarding your children's situation) in order to see the overall picture and how affordable it may be to you to lose badly on this arrangement.

Thefrenchman123

Section62 said:

Thefrenchman123 said:

Thanks for this. In terms of whether I will die, I'm pretty sure I will   but said in the OP that this would be a long term investment for the benefit of my children if the house were not sold in my lifetime.

I was trying to be tactful, but for clarity meant "If you died (say) the day after completion on the property". Your executors and family will then have difficult decisions to make.  The extent of the problem depends on the ages of your children and how they are set up already - for example if they could afford to keep (as share of) this property as an investment, or if they need funding for university and a deposit on their own first home. (see below).

Thefrenchman123 said:

As for making a profit, it's the same return (actually slightly less) than would be available to her under a traditional shared ownership scheme, so don't see it as making it 'on the back of a friend' - yes I'd get a modest return but she would be in a slightly better position than going the traditional SO route so I wouldn't be taking advantage in any way (and she can't find SO properties anyway).

In your position I'd be considering doing the same thing, so my 'on the back of a friend' comment isn't how I'd see it, but rather what I think others might see it as.  Ultimately, if things go wrong with the plan, you might find yourself in a courtroom asking a judge to allow you to evict your friend, or give you some other form of financial restitution.  This is where people's perceptions come into the equation... no matter how neutral the judge, they may well wonder "what was in it for him", and then base their judgement on you approaching this arrangement as a quasi-commercial one and thus implicitly accepting risk of financial loss.

Thefrenchman123 said:

The responses I was hoping for were more along the lines of "if she stops paying rent you can put this into the tenants in common agreement that it comes off the eventual sale, or you're then entitled to force a sale" etc.

I think you need professional legal advice TBH.  The forum is Ok for general advice and people sharing moral judgements, but your need goes beyond that - you need someone with an understanding of the details of your life (e.g. see above regarding your children's situation) in order to see the overall picture and how affordable it may be to you to lose badly on this arrangement.

Thanks - yes I realise what you were saying (hence the smiley emoticon) I realise nuance is difficult on a forum! I do appreciate the input. I think what I was asking was whether others who might have been in a similar situation - almost as an alternative to a buy to let - and how they might have approached it. My financial situation is that I’m very comfortable so that if I were to die tomorrow, the kids are well taken care of irrespective of this potential arrangement so was trying to think of a way of helping someone out who was struggling with the available scheme, whilst protecting my investment. It’s probably too tricky to achieve in practice but thought someone might have a real world example of where it had been easily achieved. 

I genuinely am grateful to all who’ve chipped in. All responses have helped with my thinking. 

eddddy

Taking a step back, and using some made-up numbers, it sounds like your plan is something like this...

Your friend wants to get on the property ladder by owning, say, a 25% share of a £200k flat. So...

• You have £150k cash (for 75% share)
• Your friend has £10k cash deposit
• Your friend wants to get a £40k mortgage

You and your friend want to share the benefits of any increase in property values. So lets say the property is sold in 5 years time for £300k

• You want to come away with £225k (a 75% share)
• Your friend wants to come away with £75k (a 25% share)
• Your friend has to pay off the balance of the £40k mortgage out of their £75k

It might be easier if you make an agreement which 'simulates' shared ownership, and gives the above outcome.



For example...

• You take out a £40k mortgage on your primary residence (which is likely to be cheaper than a BTL mortgage), then...

• You contribute £190k to the purchase of the flat for your friend - but you treat it as £150k for a 75% share, and £40k as a 'pretend' mortgage for your friend

• Your friend contributes £10k to the purchase of the flat
• (The flat is now a cash purchase - so there are no issues with mortgage lenders)

• Your friend pays you each month as though it is 75% rent plus the interest/repayments on a £40k mortgage

• When the flat is sold - you get your 75% share, plus the balance of the 'pretend' £40k mortgage

In simple terms, you become the shared owner as well as mortgage lender.

Herzlos

It's probably going to be much better and cleaner if you bought the flat outright and rented to her, but used her rent payment to build up equity which she can be gifted later.

You could keep 3% of the yield and then put the rest towards 'equity'

Bookworm225

Herzlos said:

It's probably going to be much better and cleaner if you bought the flat outright and rented to her, but used her rent payment to build up equity which she can be gifted later.

You could keep 3% of the yield and then put the rest towards 'equity'

interesting conundrum from the tax perspective

OP and friend are not related so no CGT implications for each "gift" however, if done in stages during OP's lifetime each tranche would need a property valuation to be done to establish if there was a "profit" being made on the % "given away", considering the OP is in receipt of cash that has paid for that "gift"

From the friend's perspective, as they have paid for the share being "given" to them then I not sure that they would escape SDLT implications when their ownership passes the 80% mark applied to "normal" shared ownership situations. Landing friend with SDLT bill as well as a "gift" may come as a surprise to them


Obviously if done after OP's death then CGT irrelevant as only IHT to consider in that case 

saajan_12

How much cash do you actually have? 

Could you do a private mortgage as well as the share of ownership you own? So initially you put in all the money less whatever deposit friend has. Then each month, the friend pays you the interest and capital repayment instead of a separate lender, gradually up to the [25]% they would eventually own. That removes the issue of banks or lenders not allowing this setup. Any capital increase is still split 75/25, but if the property is sold before they get to the 25% then they'd jsut pay the rest of the 25% of the amount borrowed. 


Some things to think about, discuss and nail down before you embark on anything: 

1. SDLT at higher rate on the whole purchase. For you that's what you'd face anyway for a BTL though it is higher than stock portfolios, and friend's share would also be at a higher rate. Would you cover the extra?

2. CGT for you as you don't live there, though this is limited to your share, doesn't affect friend and is the same if you invested in a stocks portfolio or BTL. 
3. Income tax on the rent you earn (and on the interest you earn if you do my private mortgage idea above). 
4. Who decides on and who pays for repairs and maintenance? Any deposit needed?
5. Who decides on and who pays for capital improvements? Is friend happy that if they pay for the work, you'll benefit 75% of any capital increase?
6. What if friend wants to move - would you sell up entirely, or pay out her share and find a new tenant? If the latter then what condition does friend need to leave it in?
7. What if friend can't pay - would you reduce the ownership, or evict and get a new tenant, or evict and sell? 
8. What if you (or your inheritors) want to sell - would friend also have to sell? How much notice is needed? 
9. What if friend wants to increase their share?
10. What if interest rates and market returns increase, meaning you could make much more for your investment elsewhere? Are the rates fixed or market dependent? 

Thefrenchman123

saajan_12 said:

How much cash do you actually have? 

Could you do a private mortgage as well as the share of ownership you own? So initially you put in all the money less whatever deposit friend has. Then each month, the friend pays you the interest and capital repayment instead of a separate lender, gradually up to the [25]% they would eventually own. That removes the issue of banks or lenders not allowing this setup. Any capital increase is still split 75/25, but if the property is sold before they get to the 25% then they'd jsut pay the rest of the 25% of the amount borrowed. 


Some things to think about, discuss and nail down before you embark on anything: 

1. SDLT at higher rate on the whole purchase. For you that's what you'd face anyway for a BTL though it is higher than stock portfolios, and friend's share would also be at a higher rate. Would you cover the extra?

2. CGT for you as you don't live there, though this is limited to your share, doesn't affect friend and is the same if you invested in a stocks portfolio or BTL. 
3. Income tax on the rent you earn (and on the interest you earn if you do my private mortgage idea above). 
4. Who decides on and who pays for repairs and maintenance? Any deposit needed?
5. Who decides on and who pays for capital improvements? Is friend happy that if they pay for the work, you'll benefit 75% of any capital increase?
6. What if friend wants to move - would you sell up entirely, or pay out her share and find a new tenant? If the latter then what condition does friend need to leave it in?
7. What if friend can't pay - would you reduce the ownership, or evict and get a new tenant, or evict and sell? 
8. What if you (or your inheritors) want to sell - would friend also have to sell? How much notice is needed? 
9. What if friend wants to increase their share?
10. What if interest rates and market returns increase, meaning you could make much more for your investment elsewhere? Are the rates fixed or market dependent? 

This is a really helpful response - thanks so much.