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I currently own an apartment in Manchester with my friend – we are looking to part ways financially. I’m not sure whether to buy her out or invest my money elsewhere on an entirely new property?


The flat I currently own was bought for £110,500 with a 10% deposit. It has been rented out for 6 years on buy to let. Its is now valued at around £85,000. I have seen a few new developments in the Greater Manchester area 1 bed flats in student areas for £65,000. Would you be able to assist me in advising what best to do? Or to guide me at all in my decision - keep the current undervalued flat in a hope that it will increase or buy a new property with hope that that will increase too but has a lesser mortgage and still good rental potential in a student/young professional area?

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You have few things to consider here.


Firstly, you need to consider the existing relationship with the friend:

  • Is she happy for you to buy her out?
  • Would this "buy-out" be based on current values?
  • What about fees / expenses incurred or which will be incurred?
  • Whose name is the mortgage in? 

After that, you need to start running numbers on your existing property?

  • What have the historic yields been?
  • What has the demand been like?
  • Have you noted significant structural repairs on the property?

Finally, you should start looking at the new property and compare it to this property, taking into account:

  • Is the potential property high yield?
  • How "safe" is this yield?
  • Do you have the funds to pay for the fees, legal expenses etc when buying a new property?
  • Will you be able to obtain the same mortgage? 90% mortgages are more rare now and hence you may need more of an investment to get a BTL mortgage on the new property.


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So if my understanding of the numbers presented is correct then you buying out your friend would probably mean her giving you money to cover the loss in value...? I guess if it was furnished or if the financial contributions into the property were different to 50/50 then that could possibly change the arrangement?


I can't see a sensible reason for you to 'invest' more money in a property that is already standing you at a capital loss to be honest but if it is making a rental profit then perhaps keeping it to ride out the storm could be an option. If your partner wants out and she does not have the funds to settle her share of the loss and assuming you don't want to throw more good money after bad at this time then one option you may consider is a lease option type of arrangement.


With a lease option, you would agree a price to buy out your partner at a future date (say 5-7 years) for a set price (possibly the point of break even or a small profit). In exchange she allows you to take full control of the property in terms of management but also costs and rental income during this time...if that suits you of course. You will need things to be drawn up properly by a solicitor to prevent any problems arising later and to give adequate financial safeguards in the event of default etc. This route at least allows a parting of the ways whilst not realising the loss that currently exists but it also relies on sensible co-operation...


Then you could also look to use your existing pot to invest elsewhere and keep the existing property at the same time :)


I would ensure that you do the research on an area to rent to check that it makes good sense to do so both from a rental income / tenant demand point of view and also a growth prospects one too. Student lets are getting fairly competitive with lots of purpose built units going up in some areas, so maybe try and check that out before taking the plunge.


Good luck!

Richard W J Brown a.k.a. The Property Voice

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