Issuses with buying a house with a friend

Scruff

A mate and myself are thinking of buying a 3 bedroom house together as an investment. Its slightly different in the fact that while both of us will be buying the place, he will be living there and i wont. This has lead to the interesting, or should i say delicate matter of how we break down who pays what.
Yes we agree that the mortgage (and everything else) is to be split 50-50 so that on the kind of repayments of approx 1400p.m. we would each be responsible for 700 each.
The problem arises in the break down or repayments given that while he will be living in one room, the other two will be rented.

As it stands we seem to have 2 different views on how much both of us then have to pay is calculated. I have spoken to a couple of people on this and most are saying 1 of the 2 ways. Without saying what they are for the moment i'd be interested in what you think is the farest way or if there is an accepted way to do it.

Obviously if we cant agree we'll have to can the idea altogether.

Cheers!

The Troll

I'm in the same boat as you. Buying a 2 bed apt with friend as investment. im gonna live there. The money situation doesnt change you still split everything 50-50.

So say its 1400 a month. He pays 700 rent. The other two tenants pay 700 each. You get 350 from the tenants and 350 from him. he gets 350 from the tenants and 350 of his own.

Then both of you pay the bank back 700. Pretty simple really.

RainyDay

Tread carefully.

If you're getting 700 per month in rent, this will be liable to income tax as it exceeds the threshold for the Rent a room scheme. At a minimum, you should ensure that you have a written agreement on the terms of your partnership in place.

Scruff

hmmm... it doesnt sound that simple, why am i getting 350 from him?

say we'e only getting 700 from other two rooms combined, what then? forget about the tax implications in all this.

ck1

Comment not in relation to the rent or monitory issues but make sure that your tenancy is set up as Tennancy in Common as opposed to Joint Tenancy.

Beruthiel

whatever you make from the tenants, you split 50/50
I don't understand why it would be any other way

Scruff

Beruthiel, so what you are saying is it should be (1400-(350x2))/2=350 each. That means in effect he is paying just 350 for the 3rd room and I’m paying 350 for no room at all.

Thats what some people have said but the majority have said that it should work like this:
We both have one room each in the house (of equal value) and split the rent we get from the third. I'm not living there so i rent my room so i get all of the money from renting that. so if my room was being rented for 350 and so was the 3rd room i would end up paying 700-(350+175)= 175 while he would pay 700 -175 = 525.
They way they look at this if he wasnt living there either it would mean we rent all 3 rooms (at say 350 each) so that means the breakdown would be

1400 -(350x3) = 350 outstanding.
so that would mean we owe 150 each.

but with him living there, and it was done split the rent from the other rooms 50/50 it would mean that having him living there would end up costing me an extra €200. I shouldn’t be subsidising his living there. He should have to pay for his room like everyone else. If it was the way you were saying and he decided to move out and the 3rd room then I would be back to paying only 150 a month so why would I want him living there in the 1st place?

MorningStar

Scruff>
I think you are along the right lines. I can't even believe people aren't considering the fact he is using the room as having value.
Before you even get down to the split of who pays what you need to figure out what way your tax is going to be. Rental income is taxable once it is past a limit and with the owners not both living in the property the rent the room scheme might not apply. There are other rental expenses such as registration. Insurance for somebody living in a house is different to that of a rental property.

House maintenece should be considered too. If the guy living there is fixing stuff and dealing with the tenants' issues. Vacant times have to be considered a lot too.

Basically I would have him pay 3/4 of the rent for the room after tax, pool all rental money then split the remainder of expenses 50-50. The main differnce is considering the tax. If you don't think the tax man will find out bear in mind they may claw this money back in 20 years like they with non resident accounts that everybody thought was safe.

Bluehair

Also you'd be strongly advised to go through a solicitor for all this and make sure each persons commitments are on paper, it'd be a receipe for disaster otherwise. Friendships have broken up forever over less.

(By the way, always being the cynical one what would your plan be if property values fall or even just stagnate?)

Scruff

Bluehair wrote:

Also you'd be strongly advised to go through a solicitor for all this and make sure each persons commitments are on paper, it'd be a receipe for disaster otherwise. Friendships have broken up forever over less.

everything like that will be signed in triplicate!

(By the way, always being the cynical one what would your plan be if property values fall or even just stagnate?)

to have a long good cry and bemoan the fact i hadnt done this 2 years ago.

explained how i saw the breakdown of repayments and after thinking about it he agreed. now he's unsure if he can afford it....

one think that has me worried is that if at this stage where rental income is not covering the mortgage, not only it being a bad thing from my point of view, is it a sign of trouble ahead?

Bluehair

Scruff wrote:

one think that has me worried is that if at this stage where rental income is not covering the mortgage, not only it being a bad thing from my point of view, is it a sign of trouble ahead?

Perhaps but it sounds to me like you're overlooking an awful lot of things. This kind of investment involves a lot more expense than mortgage-rent = profit/shortfall.

Have you calculated how much insurance (both house and life) will cost?, decorating, furnishing and fitting out the property?

As he's the one living there is he going to be responsible for finding tenants? Can you both afford to cover months when both rooms aren't occupied. What happens if he's busy/working/whatever and fails to find a tenant for one room for a couple of months? Are you happy paying half that shortfall?

Scruff wrote:

to have a long good cry and bemoan the fact i hadnt done this 2 years ago.

Seriously though are you in this investment for the long term or are you hoping to get out in a few years with a profit from property values going up? Bearing in mind stamp duty/solicitors fees/furniture etc how much of an increase do you need before you cover those costs?

If you fail to get this capital increase (never mind a property crash) how will you both cope with this?

chump

Bluehair raised many good points, surely you had this factored in? (eh eh )

Regarding the 3 bedroom house, 1400 monthly repayment issue...

Would it not make most sense to say, each room is worth 466.67 a month

(HIS ROOM) He pays this for the room he occupies. 100% his responsibility
(YOUR ROOM) You pay it for room you don't occupy (ie. you either make up this shortfall or get someone to live in this room and charge them this amount). 100% your responsibility
(COMBINED ROOM) You share responsibility for occupying this room. So either pay half room value each a month, or get it occupied. 50/50 responsibility.

Now in each of these 3 cases there is likely to be a shortfall, as you aren't going to get the same rental amount as the mortgage amount, and we have to include costs incurred.
But let's take an example...


(HIS ROOM) 100% his responsibility. == 466.67
(YOUR ROOM) 100% your responsibility. Tenant pays 300euro per month. You pay 166.67 == 466.67
(COMBINED ROOM) 50/50 responsibility. Tenant occupies pays 300. 166.67/2 each == 466.67

His payment: 466.67 + 166.67/2
You pay: 166.67 + 166.67/2
Tenants pay rest

Am I completely off here, or does this make sense?

And a few other points...
Surely you won't get away with buying to rent?
You have to break it down to its most simplistic form (above) for cases where the tenant doesn't pay or rooms unoccupied.
You would want to come up with once off costs, and a yearly cost of maintanance based on what you predict will need to be spent. And then legal, tax, accounting, etc etc... fees