Buying a share in a BTL

[sackofspuds]

Gee, this ended up being a terribly long post so I will summarise at the end; feel free to skip.

One of my friends has an investment property (2 bed terrace) which he put on the market last week. He has owned it for years. He bought it for his father and when his dad passed away he rented it out.

It's on the market for £265k, rents to long term tenants for £1k pcm so circa 4.6% gross yield.

The price looks reasonable based on the house next door going for £240k in May 2014 and next door but one going for £295k in June 2018. If all these houses are identical this means they went up 23% in 4 years.

The price reflects the fact that it is tenanted. He assures me these are not sitting tenants but they have been excellent and it would take a few months to get vacant possession. I doubt he wants - at this stage at least - to give notice because he'd rather keep the cash flow and obviously it might be attractive to an investor. The house only just went on the market.

My wife and I have been planning to get a BTL but never got round to it, just talked about it.

Anyhow, my friend bought the place by remortgaging his own house and needs to clear his own mortgage of £160k within the next couple of years, hence it's on the market.

I crunched some numbers and quite honestly on a 75% LTV BTL repayment mortgage the rent barely covers the repayments over a 25 year term. Problem is I don't have 25 years; I'm 54 so more like 10 years. That would leave me having to sell it in 10 years or sell our own house and downsize / relocate.

I guess selling in 10 years is fine but I do dislike the idea of having to. It would also put us in a lot of debt with an illiquid asset in the lead up to retirement.

For better or worse I thought I'd sleep better just helping my kids with a deposit when they come to buy, but since they are 19 and 22 that may not be for some years, say 7.

I got to thinking and wondered if my friend was being forced to sell the whole house whereas what he really wanted was to pay off his £160k mortgage.

So I asked if he'd be interested in me buying £160k worth of it or thereabouts. Obviously £160k would be 60%. To my surprise he said he was.

We could buy 60% of it without needing a mortgage which makes me happier. In 10 years we will have paid off our own mortgage.

Summary
Any gotchas I need to be aware of if buying 50% - 60% of a BTL from a friend I trust, no mortgage required?
Obviously legally it would need to be all above board.
Off the top of my head I think we need to discuss how long we each want to keep the house for and hopefully get aligned on that.
I guess too he could sell his share and I could end up owning with a stranger or having to buy him out. Not sure if we can avoid that though selling the whole thing is the obvious way out of it.

Would I still get stung with the 2nd home stamp duty on my share?
Would I be better sticking £160k in say bank prefs that are yielding circa 6% or high yield shares? I guess the answer is Yes if house prices don't rise and the market doesn't tank. As it happens, I think the risks for shares are to the downside. House prices, who knows? They have levelled off around here.

[dealtn]

Genuine question. How good a friend and could you cope with losing the friendship?

Friends are not natural business partners.

If you think it is possible to be both it will be easier if you can find a way to make it 50:50 rather than 60:40 though I would think.

Good luck.

[dionaeamuscipula]

You will need a formal agreement. I would employ a solicitor to draw one up if I were you, but think of as many "what ifs" as possible:

what if one of you dies?
what if you both die at the same time?
what if you want to sell but he doesn't? What if he doesn't want to sell but can't afford to buy you out?
What if you sell your share but he keeps his? Should he have the right to sell at the same price you have?
what if one of you goes bust?
How do you handle income? costs? taxes? Who does the work?
How do you value the property if one of you wants to sell to the other?

The best time to consider what will happen when the relationship ends is before it has begun.

DM

[Lootman]

You will need a formal agreement. I would employ a solicitor to draw one up if I were you, but think of as many "what ifs" as possible:

what if one of you dies?
what if you both die at the same time?
what if you want to sell but he doesn't? What if he doesn't want to sell but can't afford to buy you out?
What if you sell your share but he keeps his? Should he have the right to sell at the same price you have?
what if one of you goes bust?
How do you handle income? costs? taxes? Who does the work?
How do you value the property if one of you wants to sell to the other?

The best time to consider what will happen when the relationship ends is before it has begun.

I would add one other condition. If one party wants to sell then the other partner has first right of refusal.

I assume this would be set up as a tenancy-in-common to take care of the case where one party dies. That would be necessary anyway if the split is not 50/50.

[PinkDalek]

…

So I asked if he'd be interested in me buying £160k worth of it or thereabouts. Obviously £160k would be 60%. To my surprise he said he was.

If I were the friend, I'd suggest £160k buys 50%. The reason being his remaining half is far less easy to market/sell. There's a standard deduction in valuations of about 10% when valuing half shares. Are you happy your £160k gets you 50/60% of the equity?

We could buy 60% of it without needing a mortgage which makes me happier. In 10 years we will have paid off our own mortgage.

Someone can go into the detail but his mortgage company will need to be involved in the process.

Obviously legally it would need to be all above board.

Each to pay their own legal fees?

Would I still get stung with the 2nd home stamp duty on my share?

I can't think of any reason why not.

[sackofspuds]

Thanks for all the replies.

In response to dealtn:

Genuine question. How good a friend and could you cope with losing the friendship?

Yes, I could cope. He's a friend but not best friend. Without getting too corny what I do know is that he is a very kind person; always willing to help others and expecting nothing in return. I've seen this numerous times.

In response to dealtn and PinkDalek:

it will be easier if you can find a way to make it 50:50

I'd suggest £160k buys 50%

Actually I asked him today if he was comfortable with 40% and he replied that he'd prefer a 50/50 split. The only reason 60% ever came into it is because he will need £160k to pay off his mortgage on his family home in a couple of years so I offered the full amount. I didn't want to simply assume he could come up with the remainder but obviously he can.

dionaeamuscipula and Lootman, thanks for the questions. All good ones. We both have similar ideas about the minimum number of years we intend keeping it for. He doesn't want out in 3 years or anything. Of course I realise that circumstances can change but at least we are starting on the same page.

I've told him that the probability is that if he wanted to sell then I'd be suggesting we sell the whole thing. He says he has no intention of selling his share to anyone else but obviously things can change. In the written agreement perhaps we even agree that if one wants to sell the other has first refusal but if they decline then the whole thing goes on the market. That seems reasonable to me. Realistically, even without an agreement, selling half a house to anyone except the other partner sounds tough, so selling it all would always be more likely.

In response to PinkDalek:

his mortgage company will need to be involved in the process

He remortgaged his family home to buy it so there's no mortgage on the BTL house.

Tax
In terms of my half, the funds are coming from my wife and me. Would it therefore be a case of 25%, 25%, 50% shares? Sounds messy. In terms of tax, I'm higher rate but my wife isn't so I am tempted to put our half in her name. However, when we sell I presume this would mean that there would potentially be more capital gains tax because my annual capital gains tax allowance would not be usable. Is this correct? I am probably over thinking this aspect given it's a modest investment all round.

[patrickmacqueen]

Tax
In terms of my half, the funds are coming from my wife and me. Would it therefore be a case of 25%, 25%, 50% shares? Sounds messy. In terms of tax, I'm higher rate but my wife isn't so I am tempted to put our half in her name. However, when we sell I presume this would mean that there would potentially be more capital gains tax because my annual capital gains tax allowance would not be usable. Is this correct? I am probably over thinking this aspect given it's a modest investment all round.

The property could go into your wife's name for now and then, before it is sold, she could give half of her share to you without any CGT arising at that point. Then when the property is sold to a third party, you would be liable for CGT on your share as if you had owned it from the beginning, using what your wife paid as the purchase cost.

https://www.gov.uk/capital-gains-tax/gifts

[UncleIan]

It's on the market for £265k, rents to long term tenants for £1k pcm so circa 4.6% gross yield.
We could buy 60% of it without needing a mortgage which makes me happier. In 10 years we will have paid off our own mortgage.

Would I be better sticking £160k in say bank prefs that are yielding circa 6% or high yield shares? I guess the answer is Yes if house prices don't rise and the market doesn't tank. As it happens, I think the risks for shares are to the downside. House prices, who knows? They have levelled off around here.

Can I ask a silly question? I know you seemingly want to help your mate out, but if you could buy 60% of it without needing a mortgage, but you have your own mortgage to service, what interest rate are you paying on your current mortgage? Is there any mileage in paying off your own mortgage instead? Because if your current mortgage rate is anything like 4.6%, why not keep it simple?

[moorfield]

Any gotchas I need to be aware of if buying 50% - 60% of a BTL from a friend I trust, no mortgage required?

This strikes me as a very very illiquid arrangement, ie. hard to exit. (the older I get, the more I value liquidity.) If you can't answer how you would exit that easily before you enter it, I would avoid!

Would I be better sticking £160k in say bank prefs that are yielding circa 6% or high yield shares?

Bank prefs have been richly priced for a long time, the time to buy these was about 10 years ago.
In the short / medium term a single Investment Trust (such as CTY) might be an easier to manage custodian of your wealth than a basket of high yield shares.

[sackofspuds]

Thanks again for the replies.

Friend's son is now interested in buying it. Will know by Xmas if he can raise the funds.

I have an offset mortgage on my own house at 2.86%. It is entirely offset by cash in the linked savings account currently, ie, zero interest.

Buying half a BTL with savings account cash seemed like good diversification without having to get a BTL mortgage. I'd be paying 2.86% for the funds.

I have bank prefs already from when they crashed. The current yield of circa 6% reflects the reduced risk.