I am having trouble coming up with the ownership percentage I should allocate to each co-borrower. Here are the details:

My husband and I are one co-borrower and my sister is the other. We are purchasing a home together and see it as an investment, however my sister will occupy the property. Although you never think something will cause discourse, we want to have a contract prepared that gives clarity and equitable rights.

As the non-occupying co-borrower, we are putting down the 20% down payment and paying all closing fees and upfront costs to secure the loan. Purchase price of home is $300,000, we will therefore be financing $240,000. Monthly escrow payment estimated at $2045, of which my sister will pay $1400 and we will pay the remaining $645.

We will split all expenses whether repairs and maintenance or improvements that increase value. We are not looking to recoup those costs until sale of the home in the far future, as all of us see this as a long term investment.

Having a breakdown of ownership will enable us to split the tax deduction fairly when filing our taxes separately. We are located in Houston, TX USA if location is important. Also, if simpler we pay breakdown any expenses in the same percentage as the ownership. Hopefully I included all pertinent information. The appraisal on the property or current market value of the home is around $325,000.00.

Updated: Thank you so much for the replies. This was generally helpful information. I did fail to mention, that we realize this is an emotional investment and is exactly what seasoned investors tell you to steer clear of. This property happens to be directly next door to my current property. We are undergoing a massive rebuild/tear down/mcmansion situation throughout the neighborhood. So, having two "lots" side by side was an opportunity we did not want to miss out on. My sister has excellent credit and excellent rental history. She has been renting this same property for two years and we had requested the owners give us first right to buy upon their decision to sell. They honored that request and we would have attempted to purchase this property regardless of whether my sister was there or not. We understand that we are doing her a "favor," but also saw it as an opportunity to increase our collective net worth. We are working on an agreement to cover all contingencies such as divorce, moving for a job, just being broke etc. We all agree that we can rent it to someone else or sell the property if money becomes an issue. I just wanted to fairly assign ownership percentage for future buyout by any co-borrower or in case we sell the property.

  • 4
    I see a future episode of Judge Judy. May 4, 2015 at 22:31
  • Thank you for the helpful replies. I am editing the initial question to include just a little more information.
    – April
    May 11, 2015 at 16:10
  • Kudos for doing this before the purchase.
    – Alex B
    May 11, 2015 at 17:46
  • 3
    Your sister is playing $1400 rent for a house worth $325,000 (along with some vague promise to split the cost of future repairs). Why would you give her any ownership stake at all for this deal? She is getting cheap rent on a nice house, you retain all ownership, if/when she moves, you find a new tenant or sell the house, deal done. May 12, 2015 at 15:13

6 Answers 6


Sister is putting down nothing, and paying sub-market rent.

It looks to me like if she is assigned anything, it's a gift.

You on the other hand, have put down the full downpayment, and instead of breaking even via fair rent, are feeding the property to the tune of $645/mo.

In the old days, the days of Robert Allen's "no money down" it was common to see shared equity deals where the investor would put up the down payment, get 1/2 the equity build up, and never pay another dime. This deal reminds me of that, only you are getting the short end of the stick.

"you never think something will cause discourse" - I hope you meant this sarcastically. The deal you describe? No good can come of it.


Accounting for this properly is not a trivial matter, and you would be wise to pay a little extra to talk with a lawyer and/or CPA to ensure the precise wording. How best to structure such an arrangement will depend upon your particular jurisdiction, as this is not a federal matter - you need someone licensed to advise in your particular state at least. The law of real estate co-ownership (as defined on a deed) is not sufficient for the task you are asking of it - you need something more sophisticated.

Here's how things should actually work

Family Partnership (we'll call it FP) is created (LLC, LLP, whatever). We'll say April + A-Husband gets 50%, and Sister gets 50% equity (how you should handle ownership with your husband is outside the scope of this answer, but you should probably talk it over with a lawyer and this will depend on your state!).

A loan is taken out to buy the property, in this case with all partners personally guaranteeing the loan equally, but the loan is really being taken out by FP. The mortgage should probably show 100% ownership by FP, not by any of you individually - you will only be guaranteeing the loan, and your ownership is purely through the partnership.

You and your husband put $20,000 into the partnership. The FP now lists a $20,000 liability to you, and a $20,000 asset in cash.

FP buys the $320,000 house (increase assets) with a $300,000 mortgage (liability) and $20,000 cash (decrease assets). Equity in the partnership is $0 right now.

The ownership at present is clear. You own 50% of $0, and your sister owns 50% of $0. Where'd your money go?! Simple - it's a liability of the partnership, so you and your husband are together owed $20,000 by the partnership before any equity exists. Everything balances nicely at this point. Note that you should account for paying closing costs the same as you considered the down payment - that money should be paid back to you before any is doled out as investment profit!

Now, how do you handle mortgage payments?

This actually isn't as hard as it sounds, thanks to the nature of a partnership and proper business accounting. With a good foundation the rest of the building proceeds quite cleanly.

On month 1 your sister pays $1400 into the partnership, while you pay $645 into the partnership. FP will record an increase in assets (cash) of $1800, an increase in liability to your sister of $1400, and an increase in liability to you of $645. FP will then record a decrease in cash assets of $1800 to pay the mortgage, with a matching increase in cost account for the mortgage. No net change in equity, but your individual contributions are still preserved.

Let's say that now after only 1 month you decide to sell the property - someone makes an offer you just can't refuse of $350,000 dollars (we'll pretend all the closing costs disappeared in buying and selling, but it should be clear how to account for those as I mention earlier).

Now what happens?

FP gets an increase in cash assets of $350,000, decreases the house asset ($320,000 - original purchase price), and pays off the mortgage - for simplicity let's pretend it's still $300,000 somehow. Now there's $50,000 in cash left in the partnership - who's money is it?

By accounting for the house this way, the answer is easily determined. First all investments are paid back - so you get back $20,000 for the down payment, $645 for your mortgage payments so far, and your sister gets back $1400 for her mortgage payment.

There is now $27,995 left, and by being equal partners you get to split it - 13,977 to you and your husband and the same amount to your sister (I'm keeping the extra dollar for my advice to talk to a lawyer/CPA).

What About Getting To Live There?

The fact is that your sister is getting a little something extra out of the deal - she get's the live there! How do you account for that?

Well, you might just be calling it a gift. The problem is you aren't in any way, shape, or form putting that in writing, assigning it a value, nothing.

Also, what do you do if you want to sell/cash out or at least get rid of the mortgage, as it will be showing up as a debt on your credit report and will effect your ability to secure financing of your own in the future if you decide to buy a house for your husband and yourself?

Now this is the kind of stuff where families get in trouble. You are mixing personal lives and business arrangements, and some things are not written down (like the right to occupy the property) and this can really get messy. Would evicting your sister to sell the house before you all go bankrupt on a bad deal make future family gatherings tense? I'm betting it might.

There should be a carefully worded lease probably from the partnership to your sister. That would help protect you from extra court costs in trying to determine who has the rights to occupy the property, especially if it's also written up as part of the partnership agreement...but now you are building the potential for eviction proceedings against your sister right into an investment deal? Ugh, what a potential nightmare!

And done right, there should probably be some dollar value assigned to the right to live there and use the property. Unless you just want to really gift that to your sister, but this can be a kind of invisible and poorly quantified gift - and those don't usually work very well psychologically. And it also means she's going to be getting an awfully larger benefit from this "investment" than you and your husband - do you think that might cause animosity over dozens and dozens of writing out the check to pay for the property while not realizing any direct benefit while you pay to keep up your own living circumstances too?

In short, you need a legal structure that can properly account for the fact that you are starting out in-equal contributors to your scheme, and ongoing contributions will be different over time too. What if she falls on hard times and you make a few of the mortgage payments? What if she wants to redo the bathroom and insists on paying for the whole thing herself or with her own loan, etc?

With a properly documented partnership - or equivalent such business entity - these questions are easily resolved. They can be equitably handled by a court in event of family squabble, divorce, death, bankruptcy, emergency liquidation, early sale, refinance - you name it.

No percentage of simple co-ownership recorded on a deed can do any of this for you. No math can provide you the proper protection that a properly organized business entity can. I would thus strongly advise you, your husband, and your sister to spend the comparatively tiny amount of extra money to get advice from a real estate/investment lawyer/CPA to get you set up right. Keep all receipts and you can pay a book keeper or the accountant to do end of the year taxes, and answer questions that will come up like how to properly account for things like depreciation on taxes.

Your intuition that you should make sure things are formally written up in times when everyone is on good terms is extremely wise, so please follow it up with in-person paid consultation from an expert. And no matter what, this deal as presently structured has a really large built-in potential for heartache as you have three partners AND one of the partners is also renting the property partially from themselves while putting no money down?

This has a great potential to be a train wreck, so please do look into what would happen if these went wrong into some more detail and write up in advance - in a legally binding way - what all parties rights and responsibilities are.

  • Thank you for the detailed response. I have edited my initial question. This was truly helpful.
    – April
    May 11, 2015 at 16:20
  • This is hands down the best answer here
    – Bishop
    May 11, 2015 at 16:40

It may clarify your thinking if you look at this as two transactions:

  1. You, your husband and sister are forming a partnership to invest in a property,
  2. Your sister is leasing the property from the partnership.

I am an Australian so I cannot comment on US tax laws but this is how the Australian Tax Office would view the transaction.

By thinking this way you can allocate the risks correctly,


  • How is it formed?
  • Should it be incorporated or unincorporated?
  • How is it terminated?
  • Can a partner sell their interest (or part of their interest)? To the other partner only or to third parties?
  • Can such a sale be forced, if so, under what circumstances and at what valuation?
  • What to do if one of the partners dies or becomes incapacitated (key man insurance may be desirable)?
  • How are profits/losses split (both revenue and capital)?
  • Will the partnership maintain a "sinking fund" to deal with unexpected expenses or will/can it raise levies as required?
  • What repairs and maintenance is the partnership responsible for (as opposed to the tenant)
  • It should be clear that property insurance and taxes are the partnership's issue, utilities and contents insurance are the tenant's.
  • What happens if a partner defaults on their obligations?
  • How will disputes be resolved (a sensible procedure should follow the negotiation -> mediation -> arbitration/litigation path)?


  • How long is the tenant guaranteed tenure?
  • Will there be options and how are these to be exercised?
  • How much is the rent (generally this would need to be "commercial" to avoid allegations of tax fixing)?

Two things should be clear - you will need a good accountant and a good lawyer - each.

  • This becomes more clear when you break it up into two transactions, good work.
    – Pete B.
    May 5, 2015 at 12:13

The bottom line is that you can decide whatever you want to do. It is good of you to get everything in writing. What happens if she decides to move to a different city? What happens if she also wants to be bought out? It should also include contingencies for your husband and yourself. God forbid anything negative happens, but what happens if you two get divorced? Does your husband want to be an agreement with your sister if you pass away?

There does not seem to be any math to do in this case. While she is paying the lion's share of the payment, she is also receiving the benefit of having a place to live. It is unlikely that she can rent an equivalent place for anything close to 1400/month. I would estimate it would be at least 1800/month to rent an equivalent property.

So she put no money down, and she is paying below market "rent" to live somewhere. Many people would be happy to have $400/month off and handle their own repairs (let alone you still kicking in half).

Now all that said, if you want to give her some equity based upon generosity or the desire to give her some dignity, then you are free to do so. Perhaps 10%?


You and your husband are fronting all the money upfront. I'm guessing this will cost you around 67,000 once closing costs and fees are included. So obviously you would be hundred percent owners at the beginning. You'll then pay 31% of the mortgage and have your sister pay the remaining 69%. This puts your total investment at the end at 67k + 74.4k + 31% of interest accrued, and your sisters total investment at 165.6k+69% of interest accrued.

If you hold the full length of the mortgage, your sister will have invested much more than you( assuming 30 year fixed rate, and 3.75%, she'd pay 116.6k in interest as opposed to your 49.6k) She will have spent 282.2k and y'all will have spent 191k. However if you sell early, your percentage could be much higher.

These calculations don't take into account the opportunity cost of fronting all the cash. It could be earning you more in the stock market or in a different investment property. Liability also could be an issue in the case of her not being able to pay. The bank can still come after you for the whole amount. Lastly and most importantly, this also doesn't include the fact that she will be living there and y'all will not. What kind of rent would she be paying to live in a similar home? If it is more than 1400, you will basically be subsidizing her living, as well as tying up funds, and increasing your risk exposure. If it is more than 1400, she shouldn't be any percent owner.

  • Thank you so much for the response. The opportunity cost is definitely something I am having trouble assigning value to. We realize this is a favor to her, but we want to do this as a partnership. I have edited my initial question with a little more detail. I originally considered that the profit would be 50/50 after all initial costs were recouped by us, but I feel like we should get a larger cut because the purchase is only possible because of our down payment.
    – April
    May 11, 2015 at 16:23
  • What is your sister renting it for now?
    – Bishop
    May 11, 2015 at 16:36
  • She is currently paying 1200/mth
    – April
    May 11, 2015 at 20:19
  • I found the idea of treating the interest accrued as a percentage based on the shared mortgage payment and separate from the down payment enlightening, but perhaps a bit flawed as if the house were to sell for less than the initial cost the down payment wouldn't be returned, so the risk should be reworded somehow...
    – virtualxtc
    Jan 8, 2018 at 0:34

Once your sister and you make your first payments, you've paid $20,645, and your sister has paid $1400. But your sister also owes rent. Zeroth order estimate for rent is that it's equal to mortgage payment, so that's $2045 (I assume that $2045 is actually your total payment, not just your escrow payment. Unless I'm misunderstanding what the term means, $2045 is an absurdly high amount for a monthly escrow payment.) So your sister now has made a net capital contribution of ... negative $645. So you're giving your sister a gift of $7740 each year, and are the sole equity owner of the house. There's a $14000/year gift tax exclusion, and I think that both you and your husband can claim it separately, so every year you could declare your sister to have $20260 added to her capital contribution, or more if you're willing to pay gift tax. But as it stands, if there are any losses from the property, they will be borne exclusively by you; therefore, any profits should be enjoyed exclusively by you. Any other arrangement is you giving a gift to your sister. If the price of the house were to shoot up to $1,000,000 after a year, and you were to split the profits with your sister 50:50, and not pay a gift tax, you WOULD be violating tax law.

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