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I recently bought a 3 unit, 3 storey house with my husband and sister. The basement we will renting out to a tenant, my sister will occupy the ground floor and my husband I will occupy the top two floors. My sister is putting in 30% of the down payment and we are putting in 70%. We thought to divide all house expenses by this ratio of 30/70, however, her living area is more than this ratio, we share a space more like 40/60 as the third floor is smaller than the floors below. Is it fair to ask her to pay 40/60 of the monthly mortgage payments?

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Communications is key here, and get everything in writing, which clearly states what you have agreed, and avoids faulty memory. Decide in advance what portion of the house each owns. You might want to consider the problems that can arise should your or her not be able to pay. Who is getting the mortgage? You, your sister, or combined (bad idea)? –  ChuckCottrill Jan 30 at 16:35

3 Answers 3

I suggest that you first decide on what %'s of the home value you each have a legal claim to. Then split the mortgage using the same %'s. Then, if someone feels their % is slightly higher, they are compensated because they 'own' a correspondingly higher share of the house. Use the same %'s for downpayments (which may mean that an 'adjustment' payment might be required to bring your initial cash outlay from 70/30 into the %'s that you agree to).

Tenant income gets split the same way.

Utilities are a bit more difficult - as heating depends more on square feet, but water and hydro depend more on how many people are there. You can try to be really precise about working out the %'s, or just keep it simple by using the same %'s as the mortgage.

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I agree water is proportionate to people, but if hydro means electricity, not so much. There's a lot of stuff running that doesn't change if my wife and daughter weren't home for a month. I'd divide that bit by area as well. –  JoeTaxpayer Jan 30 at 3:15
    
Even though you may have different space, one area might be more (or less) desireable, and thus be worth more. –  ChuckCottrill Jan 30 at 16:38

In my opinion, since she will live in one apartment, as will you and your husband, the simplest method is to divide the ratio exactly the same as the area for your living space. If it's 40/60, she puts 40% down, you put 60%. And you split expenses the same. The tenant income can be applied to the house expenses, as it's no different than giving her 40% and you keep 60%.

No matter how well you get along, it's easy for someone to feel a split of expenses isn't fair unless it's discussed and agreed up front.

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I think what you have here is actually TWO agreements with your sister, and explicitly splitting it into two agreements will bring some clarity. The first is ownership of and responsibility for the building. The second is each of your personal use of a unit.

Here's what you do:
Treat ownership as if you're not living there. Split the down payment, the monthly mortgage, taxes and insurance, responsibility for cost of maintenance, etc. as well as the ownership and benefit of the building 70%/30%. Put all that in a contract. Treat it like a business.

Second, lease those units to yourselves as if you were tenants. And yes, I means even with leases. This clarifies your responsibilities in a tenant capacity. More to the point, each of you pays rent at the going rate for the unit you occupy.

If rent from all three units equals the monthly expenses, nothing more needs to be done. If they're more than the monthly expenses, then each of you receives that as business income on that 70%/30% breakdown. If those three rents are less than the monthly expenses, then each of you are required to make up the difference, again at 70%/30%.

Note: if any of those expenses are utilities, then they should be apportioned via the rent -- just as you would if you'd rented out the whole building to strangers.

2nd note: all that can be done with ledger entries, rather than moving money around, first as rent, then as expense payments, then as payouts. But, I think it will benefit all of you to explicitly pay rent at first, to really clarify your dual relationship as joint owners and as tenants.

Final note: I think this is a stickier situation than you may think it is.
Familial relationships have been destroyed both by going into business together, and by renting to family members. You're doing both, and mixing the two to boot. I'm not saying it will destroy your relationship, but that there's a solid risk there. Relationship destruction comes from assumptions and vague verbal agreements. Therefor, for the sake of all of you, put everything in writing. A clear contract for the business side, and clear leases for the tenant side. It's not about trust -- it's about understood communication and positive agreement on all important points.

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