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I am in a committed relationship -- but for various reasons don't want to get married. I just bought my first apartment for $200,000 on a 30 year mortgage. My girlfriend will be living with me but her name is not on the mortgage. We are trying to figure out a fair way for her to help contribute to the mortgage payments. Maybe we will eventually get married, maybe we will eventually break up, who knows. In the meantime, it would be great if there was a way for her to build equity while helping making payments.

For instance, perhaps I could track how much of the principal she has paid off each month and then (informally) agree that I owe her this money. I don't want to set up corporations or pay a bunch of money to lawyers to setup complex ownership schemes. I'm looking for something simple, legal, reasonably formal, easy to setup and tax efficient.

Any ideas?

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    One way or another, lawyers are going to get involved, even if you find a way to do this informally because the very nature of this question misunderstands how people generally act when a relationship ends. If you want to side-step the lawyers, keep finances separate. Always. – DoubleVu Dec 17 '15 at 18:03
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    If she wants to build equity then is it an option for her to get an affordable property on a 30-year mortgage and rent it out. You did not mention country nor state but one thing to consider is Common Law Marriage – MonkeyZeus Dec 18 '15 at 13:45

12 Answers 12

39

Have her chip in for the regular expenses, utilities, food, etc., and a bit for "rent." Then tell her to be sure to deposit to her retirement account, preferably a matched 401(k).

It's admirable to want her to build 'equity' but it's pretty convoluted. You can't actually give her ownership, and in the event you break up (I know you won't, but this is to help other readers) you'll have to pay her back a lump sum when she moves out. That might not be so easy.

  • What about putting a pctg of principal into a special savings account each month? – bernie2436 Dec 16 '15 at 18:36
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    Why would she pay any 'principal'? Just let her keep that amount to invest herself? Simpler is more better. – JTP - Apologise to Monica Dec 16 '15 at 18:37
  • An easy alternative would be to set up a split account for both of you. She will pay in a monthly rate, if you ever split the sum is split between you two (so each gets half) otherwise you can use it for your wedding, or vacation. Don't overcomplicate things. – Falco Dec 17 '15 at 9:30
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    He's already paying the mortgage. Why do you want him depositing money into another account? – JTP - Apologise to Monica Dec 17 '15 at 10:45
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    Especially if he is still married to someone else (?various reasons), simpler is better. She needs her own investment account in only HER name. – Gregor Dec 19 '15 at 16:49
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Equity means having ownership, and I think that's a REALLY bad idea in the scenario that you described. If you stay together, there's really no upside to either of you in this scheme. If you break-up then you'll have a terrible mess, especially if the break-up goes badly. If she's really building equity, you're going to be faced with several hard questions:

  • Who moves out and who stays?
  • If one has to buy the other out, how do you enforce that and where will they get the money? (Remember that equity is "unrealized" value in your property that you can only realize as cash if you sell.)
  • How will you compute the equity in absence of a sale to a third-party? There's no single, authoritative source for property value. If it's just the money she put in, then let her keep the money in the first place. If it's something else, I think you'll be hard-pressed to come up with something fair and reliable for how to do it.

If this went bad at the end, it might be worse than a divorce in some sense since at least in the divorce you have established law to sort out the issues. You'll be on your own here without a formal contract. (Marriage being a special case of a contract for our purposes here.)

If she wants to share costs (which seems perfectly fair) then agree to rent and a split on utilities. If you really insist on going down the path that you described, I think that you'll need some sort of contract, which probably involves a lawyer. Anything short of that could not be considered having equity at all and will be completely unenforceable in the event of a bad break-up. (There is some notion of a verbal contract, but that's very hard to prove and subject to misunderstanding and misremembering.)

Aside from all of these potential problems in event of a break-up, you would probably also be violating the terms of your mortgage, if you have one. From the bank's perspective, you are selling the property that is the collateral for that loan, which you're almost surely not allowed to do.

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    I agree with Brick. Especially on the REALLY bad idea part. – Ross Dec 16 '15 at 20:51
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    Hey, and thinking about this some more. What if you die? (Obviously not wishing you any harm!) Whoever inherits your estate is going to have to deal with this - or might just choose to ignore it. Seems like your gf could lose her "investment" in that case if everything is built on informal agreements between the two of you. – user32479 Dec 17 '15 at 15:18
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    You could fix that problem by leaving the house to her in your will. – Peter Green Dec 17 '15 at 19:35
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There is no simple, legally reasonable, way for her to build equity by helping out with your mortgage, without her having a claim to your mortgage.

The only 'equitable' thing she can do is rent from you.

If you want her to be building equity, have her start and fund a brokerage account for herself. If you have an affinity for real estate, have her buy REITs in said investment account.

  • +1, but it sounds very close to my answer... great minds think alike? – JTP - Apologise to Monica Dec 16 '15 at 20:16
  • @JoeTaxpayer yes close, +1 for you as well. My answer is a more direct "no". – CQM Dec 16 '15 at 22:54
  • The brokerage account for herself seems like the best approach, especially if "various reasons" means that he is married to someone else. In the event of his death, his wife would likely have a claim to all HIS assets, so his girlfriend really needs to have her OWN assets that are completely separate. Real-estate is not the only way to get equity. – Gregor Dec 19 '15 at 16:43
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I agree with everyone who has simply told you 'Dont' and 'You can't' and add a few more considerations that you don't want to deal with:

  • Any rental payments towards the loan expense you collect from your girlfriend must be reported on your tax return as income, usually as a 1099 which adds to your marginal tax rate.
  • You say you've purchased an 'apartment', well if that's actually a Condo or a Co-op you're probably violating at least one legal agreement already. Renting your primary residence may also be against the law in your city or municipal area (see any of the AirBnB legal battles for more info).
  • You will need to consult a tax advisor for information as to how much of your mortgage interest deduction you're waiving by having her pay rent. Given that this is the single largest tax break for most people in the US I cannot think why you'd want to give up the tax break on your taxes given that she can't claim the credit on her taxes as she's not on the loan.

What you want to do is admirable but very complicated from a financial and legal perspective. If this is really a route that you want to go down you should give up on the 'simple' and consider hiring a lawyer.

  • Regarding taxes, I agree that there are issues, but it may not be as bad as you think. The mortgage interest not deductible on Sch A as an itemized deduction should be deductible against the rental in come. I think (not completely sure) that this will be a wash if he matches the rent to the mortgage as seems to closest to his desired plan. – user32479 Dec 17 '15 at 15:11
  • Mortgage interest deduction is an utter joke unless you got screwed buying back when interest rates were high or your home is ridiculously overpriced. Otherwise it's way less than the standard deduction. – R.. Dec 18 '15 at 21:44
  • I disagree that this is admirable. OP probably wanted his girlfriend to pay a chunk of his mortgage to move in, but she balked since she would be building up his equity. Hence this attempt at giving her part of it. – jwg Jan 4 '17 at 13:00
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all the other answers are spot on, but look at it this way. really all you mean when you say "building equity" is "accumulating wealth". if that is the goal, then having her invest the money in a brokerage (e.g. ira) account makes a lot more sense. if you can't afford the apartment without her, then you can't afford to pay out her portion of the equity in the future. which means she is not building equity, you are just borrowing money from her.

the safest and simplest thing for you to do is to agree on a number that does not include "equity". to be really safe, you might want to both sign something in writing that says she will never have an equity stake unless you agree to it in writing. it doesn't have to be anything fancy. in fact, the shorter the better. i am thinking about 3 sentences should do the trick.

if you feel you absolutely have to borrow money from her on a monthly basis to afford your mortgage, then i recommend you make it an unsecured loan. just be sure to specify the interest rate (even if it is zero), and the repayment terms (and ideally, late payment penalties). again, nothing fancy, 10 sentences maybe. e.g. "john doe will borrow x$ per month, until jane doe vacates the apartment. after such time, john doe will begin repaying the loan at y$ per month...." that said, borrowing money from friends and family almost never turns out well. at the very least, you need to save up a few months of rent so that if you do break up, you have time to find another roommate.

disclaimer: i do not have any state-issued professional licenses.

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I'm glad that you feel like being fair and equitable to your party. Other answerers are, of course, correct that being fair and equitable to your girlfriend is not in your best interests but that's not what you're trying to do here and I commend you for it.

There is nothing that stops you drawing up a simple legal contract giving your girlfriend a share of the value of your house in return for her payments. Just get it signed and witnessed and checked over by a legal representative. You can include reasonable terms for the money to be paid back if you separate - perhaps when you sell the property or within two years of the breakup - that don't put you in immediate danger of losing the property. Just make clear that this contract is between you and her for a sum of money linked to the value of your house; it does not establish any legal claim on your house itself.

A reasonable level for her to claim the property would be one half of the change in equity between when you start joint paying and when you separate - should that happen.

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    Actually, the bank with which he has his mortgage might beg to differ. He doesn't actually "own" the asset outright, so they have terms that could very well make your statement false. – mbm29414 Dec 18 '15 at 15:35
  • As I said it, it's a contract between them linked to the value of the house; not a share of the house. The mortgage company can object to a second charge but they have no powers to stop him agreeing to pay a third party a sum of money. – Jack Aidley Dec 18 '15 at 16:02
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    And I'm saying that I bet they would disagree since his contract is tied to the value of an asset that is theirs to control until he pays off the mortgage. And I am not the only person on here who has said so. – mbm29414 Dec 18 '15 at 16:07
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    If the debt is not secured against the house it's none of their business. – Jack Aidley Dec 18 '15 at 17:11
  • I am pretty sure that the small print of mortgages does forbid you from writing derivatives on the market value of the mortgaged property. Maybe it shouldn't but it does. – jwg Jan 4 '17 at 13:17
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Have her pay something like a friendly monthly rent. This should be less than half of the monthly mortgage cost, since you are assuming the risk (and benefits) of a mortgage and closer to the rent of similar places near you.

For when you get married and she is to have half the apartment, have a pre-agreed way to calculate a lump-sum that she needs to provide to match your own contributions up to that time, as if you two had equal contributions from the beginning. The financially precise way to do it would be to have her pay more than the mere sum of the amount (since she will be providing the amount at a later time than you), but I would be generous and skip this in your place if the difference is not too big.

(Her lump-sum) = (your total mortgage payments)/2 - (total "rent" she payed to you) + (optional interest)

If you break up, she will have payed what would be a fair amount of rent, as if you two were renting, so, in this sense, it is fair that she would not have a claim on the apartment. In case that you two would like that she keeps the apartment, you can just sell it to her, having her pay this same amount as above and assume responsibility for the rest of the mortgage.

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There is no issue - and no question - if you get married. The question is only relevant in the event that you go separate ways. Should that happen, you imply that you would want to refund whatever amount your girlfriend has paid toward the mortgage. The solution, then, would seem to be to exempt her from any payments, as you will either give that money back to her (if you break up) or make her a co-owner of the condo (if you get married). If you actually need her contributions to the monthly nut, you could give her a written agreement whereby you would refund her money (plus interest) at her discretion.

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A 30-yr mortgage IS a committment.

So, you are willing to commit to a place, but not your long-term girlfriend???

Either you don't do this "cheap" scheme idea, or you set up as a business arrangement, or you get married.

This is quite a laissez-faire statement you make... "Maybe we will eventually get married, maybe we will eventually break up, who knows."

Anything or anyone that is a "who knows" is not what you make a 30-yr committment on.

I mean, unless you just want to risk throwing your money away.

Now, man up, hire the lawyer to do official paperwork or else get a legal certificate of civil union or marriage or whatever you want to call it.

If you try to do your cockamamie scheme "on the cheap" now, it will most surely cost you dearly in the future!

Mixing money (particulary huge sums of 200,000 $!) when there is no legal obligation like marriage or a business contract, is a fool's errand!

Now, grow up and do it the right way if you want to help her - and yourself too.

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    "So, you are willing to commit to a place, but not your long-term girlfriend???" I can sell my place but I can't find anyone willing to buy my partner on the Secondary market. She's not thrilled about the idea either. – MD-Tech Dec 18 '15 at 11:11
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I just wanted to give you a different perspective, as I own a house (purchased with a mortgage), with my girlfriend. I think it can be done safely and fairly, but you do need to involve legal help to do it right. There really is nothing to be terrified about, the extra cost to set this up was almost irrelevant in the bigger picture of legal costs around purchasing and the documents describing the ownership scheme are quite straightforward. Maybe it's a UK thing, but it seems rather commonplace here.

We've chosen to hold this as "tenants in common" and use a trust deed for this when we purchased. We had a solicitor write the trust deed and it clearly states what percentage of the house is owned by either party and exactly what the steps would be taken, should we decide to end the trust (e.g. in case of a split-up). This includes things like the right to buy out the other person before selling on the market etc.

We also had to make wills separately to indicate what should happen with our percentage of the property in case one of us died as with this type of ownership it doesn't automatically go to the other person.

Finally we're both on the mortgage, which I guess is the main difference versus your situation. But again, you could get legal advice as to how this should best be handled.

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    Something like this could be done in the US also. It does not meet my reading of the OP's parameters however since (a) he already bought the house with (b) a mortgage that does not include the girlfriend's name and (c) he doesn't want to pay legal costs. – user32479 Dec 23 '15 at 14:30
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This is fine, just have a plan before you go into it. Look up a co-ownership agreement contract off LegalZoom, they are like $15, or get a lawyer if you want. Decide if you want to be "Joint tenants" or "Tenants in common". You probably want to be joint tenants so that if one of you dies the property goes to the other person. Go through the agreement, make any changes you want, and then both sign it. These documents outline what happens if someone dies, or if you break up, or if you are allowed to sell your ownership, and anything else.

Keep a record of who has paid what % of equity towards the house. Also look into tax laws, if the mortgage or house is only truly in 1 person's name they may get a tax break that the other person will not get.

The co-ownership agreement is essentially the same agreement that happens when you're married, the only difference is that it happens automatically and implicitly when you're married.

It's interesting that some people are saying this is a horrible idea when it's practically the same as the agreement you'd have if you were married. Whether you're single or married, if you own a house with another person and you break up, it's going to be a bit complicated. Get a contract in place beforehand so that things go as smoothly as possible. If you are both rational adults you shouldn't have any problems.

  • This post provided new and relevant information yet was voted down. I can only assume that's for going against the grain, since no reason was given. – Brendan L Nov 4 '16 at 19:17
  • I voted this down because of 'essentially the same agreement that happens when you're married' which glosses over the important differences between marriage and something quite like marriage. What you think if your boss said 'this offer is essentially the same agreement as an employment contract'? What if your bank offered you a product which they said was 'essentially the same agreement as a federally insured bank account'? Also the last sentence is way too optimistic, and as per @DoubleVu's comment on the question, ignores how people usually behave when they break up (spoiler: irrationally). – jwg Jan 4 '17 at 13:10
  • I agree it would be weird if a boss or a bank did the things in the examples you gave, but that's different than the scenario in my answer. The analogies you provided do not equate to what I said about marriage. I can't say the co-ownership agreement is always 100% the same as what happens when you get married. But in most scenarios and most states, it is. I'm pointing out its very similar to marriage so that the OP can have confidence in it; it's a legally binding contract. family.findlaw.com/marriage/… – Brendan L Jan 4 '17 at 19:02
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I'm looking for something simple, legal, reasonably formal, easy to setup and tax efficient.

You just described marriage. Get married.

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