2

My brother and I are buying a home for 415k. The Downpayments are uneven; I pay $28,500 (68%) and he pays $16500 (32%). It seems fair to split profits when we sell the house proportionally to this but we are struggling to figure out the rental scenario.

We will be renting the home for extra income but I will live in one of the rooms and he lives in a different city.

Is it fair that the rent I pay will go towards a mortgage that I will benefit more from?

Say the mortgage is 1600, and I can rent 2 rooms out for 1000 each and live in the basement. So as to not live for free I would pay rent of 1/3 of the mortgage ($533) and I would act as the property manager.

The total amount of profit for the home is $2533(rents)- $1600(mortgage) is $933 per month. I'm happy to split this evenly with my brother despite uneven downpayments ((is splitting based on downpayments fair?)) but his worry is that I still have an extra advantage on the property because the rent I pay will partially go against the principal of the house - so I'm basically paying myself.

How much rent should I pay if this is correct, to make sure we both profit from this house monthly and when we sell? We both want to be fair and will bring it to a lawyer when we're both happy.

4
  • 1
    Do you split non-mortgage expenses (property tax, insurance, repairs) evenly or is that all on you and it affects the rental income that you'd then split? – Hart CO Apr 17 at 14:30
  • 2
    Do you believe $533 is fair market rent for the basement or did you come up with that number as a discounted rent for acting as the property manager? – Hart CO Apr 17 at 14:48
  • How are you going to split the mortgage payments (and all the other expenses)? You should keep track of the money that goes into the house to determine what share of thehouse each of you has. Splitting all expenses (including the down payment) by the same percentages will simplify this as shares will stay constant. – Rad80 Apr 18 at 19:58
  • Don't you think the fact of your being both a partner and a tenant of the partnership is confusing the issue? On the face of it, the rent you pay should be relevant only if it's not a fair market rent, ie, if you're getting special treatment. That you're "paying yourself" is an illusion that should go away if you put all the figures in a spreadsheet and give whoever is paying the rent the separate identity of "Tenant" rather than "Dylan." – Robbie Goodwin Apr 18 at 23:52
7

You really need to wear two separate hats, the tenant hat and the (co)owner hat. Your brother will wear a co-owner hat as well. You should also, separately, loan your brother enough money that you make equal down payments. He should pay you back separately, outside of whatever you do with the house.

See my other answer here for more: Two siblings own home with mortgage. What is fair for both parties?

3
  • Hi, thank you for the advice. I think what I've learned is that we were over thinking it. What is the advantage of evening out the down payments? Is it just to keep it simpler? (I ask because currently each of us is maxing out what we have but perhaps even it out down the road.) – Dylan McKay Apr 17 at 22:17
  • you miss that there are three hats, not just 2. And the down payments should not necessarily be even. See Kaz's answer. – Rad80 Apr 18 at 20:04
  • @DylanMcKay: Yes, equal down payments, equal ownership keeps things much simpler down the road. Think about future repair costs and how to split them. Or upgrade costs, in case the tenant (you) wants a fancier bathroom, but the owners (you and brother) don't want to pay for it. You could certainly have ownership and voting models to handle this - but keeping it equal is easier and probably better for your relationship. – Michael Apr 19 at 18:39
7

The way to do this is to separate the 3 different roles you're playing:

Role #1:

You and your brother as owners of the property who pay the mortgage. Who pays how much? How is that used to calculate how much of the house you 'own' when you come to sell it? (Ideally the answer would be 50:50, with an adjustment for the different down payments, so maybe more like 52:48).

What are you going to do if the rent doesn't cover the mortgage, or you have to find £10k for an unexpected expense? Who's paying for the insurance, and the utilities? These are all things you should figure out as if neither of you are going to live there. IE as if you were going to buy some other investment property.

Maybe you run it as a quasi-business where you keep a profit/loss account for the property (Rent, Mortgage, Upkeep) and pay out / pay in as necessary.

Then Role #2:

Your role as tenant. Which should just be to pay whatever the market rate for your room is, as if you were any other tenant.

And finally Role #3:

Your role as property manager. I would honestly just look at what property managers generally charge and pick something low-but-reasonable.


The key point is that you and your brother are still getting the same rent you always would have, and paying the same expenses you would have always had to. The fact that some of it is paid by/to you doesn't matter as long as the amounts are the same.

You can simplify the results when it comes to drawing up a contract, but you should explicitly agree the various different numbers between yourselves first.

1
  • 2
    Great answer. I would also point out that separating the roles also provides answers if the situation changes in the future (the other owner moves in, the OP moves out, a professional manager is hired,...) – Rad80 Apr 18 at 19:52
3

Seriously, why not keep it clean and pay rent as if you were one of your own tenants? Yes, you get some of it back if you "pay" yourself out of rental proceeds, so why make it complicated?

Not only that, but there's a way to see you paying less rent as a theoretical loss, since what you pay is less than you'd receive from a regular tenant. Whether you pay less rent to begin with or pay full rent and get some portion of it back as "profit" is almost a distinction without difference in many ways. I can't speak to the tax implications of this - I'll leave that to much more expert voices here, but it's possible there could be some tax consequences either way which might factor into this, so you might also ask about this.

Is your brother okay with considering your work as "property manager" sufficient to offset the "lost" rental income a full-paying tenant would pay such that this is fair?

Perhaps one other solution would be for you to assume enough of the expenses of the property (i.e., some of the utilities, insurance, etc.) to make up the differential in what you're not paying in rent to balance it out.

While I can't speak to your family relationship, it would be terrible if at some point your brother were to come to a conclusion you're somehow "getting over" by paying less rent to live in a house he's helping to pay on.

My preference would be to keep it as neat, clean and simple as possible.

8
  • OP indicates he is paying rent. "So as to not live for free I would pay rent of 1/3 of the mortgage ($533) and I would act as the property manager." The question seems to be what is the equitable split of the rental income. – Hart CO Apr 17 at 14:43
  • So if he pays full rent as though he was another tenant, the fair thing to do is a two-way split of net proceeds. Is it fair to say being "property manager" dealing with just two tenants is worth almost half rental rate each of them pays? How is it fair to his brother to pay 1/3 of the mortgage, leaving the brother who DOESN'T live there to pay 2/3. What would the agreement look like if NEITHER of them lived there? If they're going to proportionally split proceeds of sale, why not do the same with rental net income? – SRiverNet - reinstate monica Apr 17 at 14:49
  • Ah, I see, you're assuming the basement could be rented for another $1000 if it was another tenant and not OP? You could be right (or maybe it could rent for even more depending on the unit), but typically basement units/rooms rent for significantly less. – Hart CO Apr 17 at 14:53
  • True, but how much less? Often that depends on condition, living space, etc. Hard to know, but the more I think about it, there could be tax consequences, because how do they account for the "labor cost" of the brother acting as manager if he isn't receiving a check or some direct payment? The point is, this is complicating the simple - to me, pay equitable rent for the basement as though you're any other tenant, then proportionally split the net rental proceeds. Keep it simple, you know? – SRiverNet - reinstate monica Apr 17 at 14:56
  • Then he acts as property manager for free? Too simple can't be equitable here due to unequal benefit/contributions. – Hart CO Apr 17 at 14:57
1

I would recommend that you think of this arrangement as a simple business. Whether you formalize this or not, I believe it's a useful paradigm for handling things fairly.

The scenario starts with you and your brother each owning some portion of this business. With your arrangement, you may decide that you each have equal voting power (i.e., you both have 50-50 say on what happens), but you have un-equal ownership. You own 68% of this "business", and your brother owns the rest.

This business, which was funded with a total of $45,000, then decides to use that money to purchase a house, and take on the responsibility of a mortgage. The business also decides to rent out the house to a tenant (which happens to be you), and will use this revenue stream to pay for the mortgage and the other bills associated with the house (and the business in general).

In your scenario, it sounds like the business will benefit from a property manager to manage the many rented rooms. The salary of this property manager would be one of the expenses that the business has to pay. Part of this salary may be reduced rent for this property manager. As co-owners of the business, it's up to you and your brother to decide what is a fair salary for the property manager (whether or not it's you).

To account for this, you should maintain a ledger which lists all outgoing and incoming moneys.

As owners, you may wish to take a distribution of moneys from business. In a typical business, you might consider this a dividend. Each owner would receive a dividend in proportion to the stocks they own. For example, $1 per stock.

In the end, when you decide to liquidate the business, you simply split the business's assets according to your ownership stakes.

0

Just forget for moments that you are the partially owner when you live there...Just collect all rentals money from other tenants+you. Sum the amount and just split 68% and 32% Problem solved :)

0

Your situation is complex because there are so many differences between you. I'll expand on Kaz's answer with a few more points.

The first choice you two should make is how much of the house expenses you want to take on. This is not limited to the initial payment as house expenses are numerous and will come continuously, often unexpectedly. Keep track of all the money each of you has put into the house. Think of it as the "equity" of your house. Use your totals to split the value of the house if you want to sell it.

If you always split payments with the same propotions your share of ownership will not change. If you split any expense some other way, either because one of you has a problem or if you want to alter the shares, the share of ownership is adjusted to match the proportion of the total money payed by the two of you.

I'll just leave Kaz's answer for the separation of the three roles you have. Keep them distinct and write down everything. Agree on what the process will be to change the amount of both your rent and your "salary" as a manager.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.