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A friend of mine owns an old house which requires renovation. They proposed me to pay for the renovation, and in exchange, I could live in the house and pay a smaller rent (or perhaps no rent for a few years). This would be legally enforced with a specific contract.

I am trying to calculate how beneficial it is for me to make this move. This depends on how long I will stay in the flat, the actual cost of the renovation, and how much money I save by paying a smaller rent for the next years. I would like to calculate how long it will take for me to amortize the renovation cost.

By not accepting the offer, I would pay around 400€/month for a flat with similar characteristics.

The cost of the reform is still unknown, but I am making the case with something ranging between 6000€ and 20000€.

Cost (€) Amortization (months) Amortization (years)
6000 15 1,25
8000 20 1,666666667
10000 25 2,083333333
12000 Base Monthly Rent (€): 400 30 2,5
14000 35 2,916666667
16000 40 3,333333333
18000 45 3,75
20000 50 4,166666667

So for a renovation cost of e.g. 6000€ it will take me 15 months to amortize the renovation cost provided I pay no rent to my friend during that time.

Now I would like to calculate the same, but assuming I am paying 200€/month instead of nothing. I am not sure how to take this into account for the amortization period.

I will be grateful for any help regarding that calculation. Also let me know if the deal makes some sense in your opinion, or any other considerations I might be missing.

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    The calculation is named "Present Value of a Series of Equal Payments". You will find versions of the formula that account for inflation, tax, etc.
    – Ben Voigt
    Jun 1 at 22:52
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    Does your country allow DIY work on rental properties? Many absolutely require that licensed contractors do all work in a rental unit. Jun 2 at 1:16
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    Do you have the money at hand or would you need to take a loan for it ?
    – zakinster
    Jun 2 at 8:48
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    I did something similar once because it allowed me to use colors and materials that a landlord would not have paid for. But that was a much smaller scale - sinking 20 000 Euros of your own money into a rented property does not sound like a great idea. Jun 2 at 11:07
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    If your friend is excited about this arrangement but you're hesitant then that means it will be bad for you.
    – MonkeyZeus
    Jun 2 at 12:22
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I generally find that when two things are mixed together, it doesn't end well. Your friend wants to borrow the money for a renovation, and perhaps can't borrow elsewhere, and you want to live in a nice place. Rolling these into "you pay for the renovation" and "you pay less rent" could be a disaster. Consider:

  • if the reno goes over budget, are you just expected to pay for the extra?
  • if you want to move elsewhere after just a few months, how will you be compensated for your loan?
  • if you and your friend disagree on some aspect of the renovation (I would like a larger sink or more glamourous window or fancier stairs) who makes the decision? You, because you're paying for it and living in it, or your friend, because they own the house?

I think it is far wiser to do two separate things:

  • first, loan your friend some fixed number of euros for the renovation. Interest rates are very low right now, but do charge interest, so as to be fair and arms-length about it. Choose a low fixed rate like 1 or 2% a year that is more than you would earn in savings and less than they would pay on a loan. Have a proper contract for this with repayment terms, so much a month. You don't have to do an amortization if you find that hard: just have the payment be some fraction of the principal, plus interest for the month on the current principal, so the payment will get slightly smaller over time.
  • second, rent the apartment from your friend at a fair market rate.

It may be that you give your friend a cheque for 400 each month and they give you one for 405 at first, which falls as the loan goes down and so the interest amount goes down. It may seem silly to exchange these payments. But it won't seem silly if you move out, stop paying rent, and still get your loan payments. It won't seem silly if the loan ends, fully paid back after whatever time period you agreed, and you keep paying rent. It removes all the armwaving about "but by this time on a loan we would be paying far less interest, so really you should now be paying at least a little rent." It also lets your friend work out their taxes accurately and fairly, knowing both their expenses and their income for this property.

As a nice side effect, all the reno decisions and obligations are on your friend, not you. They choose the materials, the appliances, the finishes. If it goes over budget they find the money. If it goes under they benefit. They might ask you what colour you like, because you're their friend and tenant-to-be, but they are the ones who will own and pay for things like the roof and the stove and the tub, so they are the ones who will choose that. A huge source of conflict evaporates.

Note: If the idea of lending a friend tens of thousands of euros worries you, if you know the bank won't lend it to them, if you aren't comfortable with contracts, if you're concerned the friend might not repay you, or that your friendship would be hurt by having a financial aspect to it, then that should be a reason not to do this at all. Making the loan more informal and the repayments be in rent relief doesn't alleviate any of the worries I've just listed, if anything it would add more to them (my first set of bullets) or make them less clear and more something to argue and disagree about later.

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    Lending a friend money for a renovation might be far-wiser than paying for the renovation as a tenant, but for many people it's best not to get involved with lending money to friends.
    – Hart CO
    Jun 1 at 14:48
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    in fact one benefit of this approach is that it makes it clear you're lending a friend tens of thousands of euros, and encourages you to think about why you're doing that. Jun 1 at 15:15
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    Thanks for your point of view on this, sounds like a pretty reasonable advice.
    – user109730
    Jun 1 at 17:22
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    Lending large amounts of money to a friend is a nice way to lose a friend and some/most/all the money. Even with a contract, the friendship will not feel the same until the money is paid back in full, if, indeed, it ever is.
    – ARich
    Jun 2 at 0:11
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    @blankip I signed papers for a mortgage YESTERDAY at 2.2%. Not everyone lives in the USA. I chose a number that is market rate where I live. Jun 2 at 13:01
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Since your friend is the owner of the property, he will be the owner of the renovated property. Unless you gain ownership on part of the property in exchange of your investment, your arrangement is equivalent of you lending 6k€-20k€ to your friend and him repay you in rent discount.

Others have already addressed the issues of this arrangement and the need to dissociate the loan and rent as two separate and independent arrangements in order to contain the risk/reward for each party.

But the real question in my point of view is: why would you loan up to 20k€ to a landlord while yourself is just a tenant ?

You may want to first prioritise your own investment before helping other invest your own money.

You need to understand that your friend, as the owner, will make a profit on this investment (in real estate capital gain) which will most definitely exceed the initial investment.

In order for this arrangement to be fair, you would need to make a profit as well in your investment, so you would need to charge interests which will have to be taken into account in your calculation.

If you don't have the money at hand, there's no point. You can't borrow money from an institution only to lend it to someone else. No respectable institution will let you do that and for good reasons.

If you do have the money, you need to ask yourself : is this the best way to invest my money ? Lending money is a high-risk low reward business which is better left to professionals.

In the interest of your friendship, a much better arrangement would be for your friend to take a loan from a bank (more competitive for him) and you to invest you money elsewhere (more profitable for you). You can still rent the property and help you friend in the renovation process (design, material choice, construction work supervision, etc.).

If your friend can't get a loan from an institution, you would need to ask yourself : why would I put myself in a situation regarded by all professionals on the market as either too high-risk or not profitable ?

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You don't need a spreadsheet.

In the first case, you are looking for the number of months m where

400m == 6000

The initial €6000 investment covers 15 months of rent.

If you pay some additional rent of €200 on top of the initial investment, the equation becomes

400m == 6000 + 200m

where solving for m yields m = 30.

This doesn't take into account any tax laws that may have something to say about this arrangement. Is your investment a loan, and if so, is there a nominal amount of interest that you must charge in that case? Is any part of this transaction considered income for either party? For that, you'll need to at least specify a country for someone (not me) who is familiar with the applicable tax laws.

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    The time value of money (opportunity cost) is also important to consider Paying 6000 euro now in order to recover 6000 euro several years from now yields an ROI of zero percent, and is effectively losing money when you consider any other investment option. Jun 1 at 16:30
  • It was pretty easy then, thank you for the answer!
    – user109730
    Jun 1 at 17:23
  • @NuclearHoagie That's true, but if we're only talking about 2-3 years, the volatility of the market makes it difficult to account for that. It becomes more important when you consider longer terms, like 15-30 year mortgages.
    – Barmar
    Jun 2 at 14:20
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    @Barmar Assume 10k is used for renos. 2% interest rate would yield 200 EUR per year lost. So roughly speaking, forgoing interest would be equivalent to the OP giving his/her friend 500 EUR of free money if it took 2-3 years to pay off. Jun 2 at 15:37
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    @Grade'Eh'Bacon OK, now I understand you. So we have to include the missing interest in the calculation, not just the loan principal.
    – Barmar
    Jun 2 at 15:46
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Easiest to think of it this way:

The market rate for the flat is 400€/mo.

  1. If you need to pay 0€/mo rent, you save €400 each month. Thus it takes 6000€/(400€/mo) = 15 months to get back your investment.

  2. If you need to pay 200€/mo rent, you save 200€ each month. Thus it takes 6000€/(200€/mo) = 30 months to get back your investment.

As an additional point; I don't think it makes any sense to loan any amount of renovation money to your friend, no matter the contingencies.

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    Similar to another answer, this forgoes the impact of interest that should be charged to acknowledge the risk taken on by the lender [the OP]. Jun 2 at 15:45
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    No, I meant that lending to this friend even with interest is a terrible idea.
    – ruohola
    Jun 2 at 19:27
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The other answers address the numbers and legal arrangements.

Also let me know if the deal makes some sense in your opinion, or any other considerations I might be missing.

Consider the money a gift to your friend. Are you willing to give that much money to your friend?

Do not move forward with this arrangement unless the answer is yes. It's not really a loan unless you are willing to collect the debt. If your friend fell into misfortune, would you be willing to, for example, take possessions or garnish wages to recover your money?

If you can't afford to give the money, you should stick to more clearcut arrangements.

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