Should I invest in half a house?

Reginald P. DuM

Hello, a question which I'm hopeful someone in the know could help me out with!!!

A close friend is in some financial hot water and needs bailing out, he has offered to sell me half his house for 90k. This house was bought as investment, my friend has being renting it out for 6 yrs, he does not live there. The house is currently valued at minimum 205k. The house is about to be tied into contract with the local council where they take it for 5yrs at a guaranteed income of 725e p/m. I would get half (362.5e) that to put towards repaying my initial outlay of ninety grand. Which leaves me to add about 120e p/m to make the mortgage repayments. Thirty euro a week doesn't seem like a bad amout to be putting towards 50% ownership. Ten yrs of half ownership would cost me in the region of 16,500 euro. That does not include mortgage protection as I have not got the cost to hand.

The house,(regular 3 bed semi) given the area it is in, is unlikely to drop too much further in value, certainly not down to 180k.. As a 5/10 yr investment it strikes me as a reasonable propostion but I am assuming there are issues and possible pitfalls I haven't yet considered. For example am I liable for taxes of any kind? Is the property market values in the south likely to recover and improve? I would appreciate any input to help me toward a decision, all questions gladly fielded.

I have had a very close friendship with this person for 15 yrs, and believe that we could handle this, with the help of our solicitors of course, in a responsible manner in order to gain a little something from it..

Thanking You in advance,

Reg......

Victor

Reginald P. DuM wrote: »

The house,(regular 3 bed semi) given the area it is in, is unlikely to drop too much further in value, certainly not down to 180k.. As a 5/10 yr investment it strikes me as a reasonable propostion but I am assuming there are issues and possible pitfalls I haven't yet considered. For example am I liable for taxes of any kind? Is the property market values in the south likely to recover and improve?

While low interest rates will slow the drop in prices, what makes you think it can't drop anymore? We are in a serious recession - anything can happen.
How do you know your friend isn't looking a thte value through rose-tinted glsses?

As landlord, you will still need to maintain and insure the property and there will likely be other costs.

I assume you are registered for tax in the UK - AFAIK this means that your Irish income is treated the same as domestic UK income, but you need to check that out. I imagine mortgage interest (but not capital repayment) is allowable against income tax.

There will also be costs associated with the transaction - valuation, solicitor, expenses, stamp duty (a lot higher than in the UK) - your friend should bear these.

The council may be obliged to withhold a percentage of the rent if you are not based / registered here for tax.

Do you go for a euro or sterling mortgage to fund this? What if the euro falls against sterling? Or vice versa? Over 5-10 years?

Lots of complications and you really need to talk it over with a financial advisor and solicitor.

johnnyskeleton

Reginald P. DuM wrote: »

Hello, a question which I'm hopeful someone in the know could help me out with!!!

A close friend is in some financial hot water and needs bailing out

Well that's too bad, but remember to keep business and personal separate. Don't pay your friend more than you would pay a randomer.

Reginald P. DuM wrote: »

he has offered to sell me half his house for 90k. This house was bought as investment, my friend has being renting it out for 6 yrs, he does not live there. The house is currently valued at minimum 205k. The house is about to be tied into contract with the local council where they take it for 5yrs at a guaranteed income of 725e p/m. I would get half (362.5e) that to put towards repaying my initial outlay of ninety grand.

Get an independent valuation of the property and get your own solicitor to look at the terms of the council offer. Make sure that it is legit and has no hidden surprises.

Reginald P. DuM wrote: »

Which leaves me to add about 120e p/m to make the mortgage repayments. Thirty euro a week doesn't seem like a bad amout to be putting towards 50% ownership. Ten yrs of half ownership would cost me in the region of 16,500 euro. That does not include mortgage protection as I have not got the cost to hand.

How long is that mortgage term? 30 years? What if interest rates go up in the next few years (as they well might). What other expenses will you need to pay e.g. upkeep, repairs, utilities, management fees, ground rents etc. Find out all these things to try to estimate the exact amount it will cost you over the period. Allow for interest rates to rise by up to 4% just to give you an idea of how high the repayments could get.

Reginald P. DuM wrote: »

The house,(regular 3 bed semi) given the area it is in, is unlikely to drop too much further in value, certainly not down to 180k..

Really impossible to say, but if that is your view then make the decision on that basis. At least, if the investment goes awry, you can't blame anybody else.

Reginald P. DuM wrote: »

As a 5/10 yr investment it strikes me as a reasonable propostion but I am assuming there are issues and possible pitfalls I haven't yet considered.

A 10 year fixed rate mortgage of the full €90k at 4.14% (from AIB) will cost you €928.85 per month. Over 5 years it's €1,674.19. If you 5/10 year investment you mean take out a long term mortgage and then sell in 5/10 years, this depends on what the property market is like in 5/10 years time. It's up to you to make a prediction on that, and be bound by the consequences.

Reginald P. DuM wrote: »

For example am I liable for taxes of any kind?

Yes, stamp duty when you buy, capital gains if you sell at a profit, and you might have to pay income tax on the rental income. You should speak to your solicitor and/or accountant about these matters.

Reginald P. DuM wrote: »

Is the property market values in the south likely to recover and improve? I would appreciate any input to help me toward a decision, all questions gladly fielded.

By recover do you mean return to the heady days of 2006? I don't think so. If by improve do you mean prices increase, again I don't think they will do that for a long time. It seems to me that house prices are going to continue steadily downward for a few years, but that's just my opinion.

Reginald P. DuM wrote: »

I have had a very close friendship with this person for 15 yrs, and believe that we could handle this, with the help of our solicitors of course, in a responsible manner in order to gain a little something from it..

While I admire your altruism, look after yourself first. It may well be the case that your friend isn't actually in trouble, but is just looking to drag someone down with him. Make sure you get separate legal advice, and make sure that you do the numbers out for yourself. At worst, this may mean asking him for a greater stake for your €90k (or a lesser amount for your 50% stake) but just make sure you know what you're getting yourself into and that it is worthwhile independent of your desire to help your friend. If it is not worthwhile for you, the best help for your friend may be to advise him of the reality of his situation, rather than joining him.

SkepticOne

The bottom line is the yield and you are getting 4.8%.

Then you need to factor in a lot of uncertainty about the future.

1. It is absolutely certain the local authority will enter into this contract? You should wait until they do before committing.

2. Will the local authority renew the contract for another five years? Will it be on the same terms for the same money?

3. If they don't what is the market like for private rents?

4. Future value of the property? Perhaps this "recovery" is a delusion and we're simply returning to normal prices. Who knows.

While no one knows the answer to these questions, everyone will agree that there's a lot of uncertainty out there and this uncertainty needs to be factored into the equation. I think 4.8% would be a good yield for a very secure investment but in the current climate you need to be going for more than that.

antoinolachtnai

I'm not sure you know what you are getting into here.

You are an investor of last resort. I presume your friend has tried and failed at getting the money he needs from his bank.

You would need to have a clear agreement on what will happen if either of you want to end the deal for whatever reason. At a minimum, you need to have an option that allows you to sell the entire if you want to. He mustn't be able to sell his half to someone else without that someone offering to buy you out at the same time.

The americans call this 'tag along - drag along'

The bank won't lend you money on the strength of this house if there isn't a way for them to sell the house if you default. True, you could borrow against your own home, but commercially speaking, owning property that you can't borrow money against is just a waste of time. The whole point of owning property is that you can borrow on the strength of it.

You won't actually be buying a 50 percent share in the house. There's already a mortgage against the house, and this will stay registered against it. That mortgage will have priority over your purchase.

As another way of doing this, you could just lend him 90k, and have him pay you back 900e/month for the next ten years. Not saying this is a good idea, but it might be what your friend needs, and would save you the bother and risk of property ownership. It might also be more tax-efficient overall, although you'd have to get the sums done.

You could potentially register this loan as a second mortgage on the property for this money. This would give you some degree of security if there was a problem and your friend couldn't pay anymore. I am not certain about how feasible this would be. You would really need to talk to a solicitor.

Another alternative, if you think this is a good investment, would be to buy the whole house off him. It would be easier for you to get the money to do this.

Also, I think you need to do a bit more investigation of the tax side of things. I presume this house has no capital allowances, so you would have to pay a considerable amount of tax on the income.

All in all, I would say that a 50 percent share in that house is probably worth about 30 or 40k, not 90k. Serious professional commercial and legal advice needed here.

I hope you can find a way to give your friend the help he needs, whilst improving your own position.

The_Conductor

I would just like to point out that a return on investment of 4.8% given current market uncertainties, is extremely poor. A more resonable return, and one on which an investment decision could be based- would be around 7-7.5%

The economics of the proposal, as it stands, do not stack up.

iguana

Reginald P. DuM wrote: »

The house,(regular 3 bed semi) given the area it is in, is unlikely to drop too much further in value, certainly not down to 180k.

What exactly makes you think this? No area exists in a vacuum, if the surrounding areas drop it will too. With rising unemployment and a massive oversupply of properties in Ireland the odds are prices will fall an awful lot more. How could any area be immune to that? What 5 years from now €180k is considered astronomical for this property?

Reginald P. DuM

OK decision made folks, turned out to be an easy one after a little digging.. Thanls for the input..

Reg....