Consumption and Real Estate
What is a good formula for splitting profits on a rental property investment?
Question : What is a good formula for splitting profits on a rental property investment?
I am involved in a 3-way investment on a rental property and we are being forced to sell because of a DOT project. Our profit on this property will be approximately $ 75,000 and we need to figure out how to split this up. Being close family members, we weren’t too concerned about figuring this out we bought the property.
I would really appreciate any suggestions from real estate investors experienced with partnership investments like this.
Here are the figures for the capital and work/mangement invested by each party.
Investor #1:
Invested $ 150, 000 by taking out a regular home loan.
Lived at the property and payed “rent”.
Did 85% of the maintenance, improvements and rental property management.
Investor #2:
Invested $ 75,000 from a home equity line of credit.
Did 0% of the maintenance, improvements and rental property management.
Investor #3:
Invested $ 25,000 from a home equity line of credit.
Did 15% of the maintenance, improvements and rental property management.
Thank you!
investment property management
Best answer:
Answer by sarah W
legally it could be a even 3 way split
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#2 written by andy_phillips95125 1 year ago
First, I’ll assume that the rent paid by #1 was fair market value rent. If it was less, then what I’m going to suggest should be adjusted accordingly.
If you figure out how much it would have cost to have the property maintained by someone else, you can put a dollar figure on the maintenance, improvements, and property management. That’s usually about 10-15% of the fair market rent value each year. If you had rent of $ 1,000 for 3 years, 10% of that figure would be $ 3,600-$ 5,400, depending on the amount of work it took to take care of the place. If you had it for a long time, this can add up to a lot of money.
Whatever you figure the value of the maintenance and other work was, #1 should get 85% of that and #3 should get 15% of that figure. Remember to adjust this if #1 was paying less rent than an outsider would have paid, because that would mean they already benefited while living there.
If you take the net profits less the figure you derived for managing and maintaining the property, you get a net number that represents just your investment property gain. This should be split 60% to #1, 30% to #2, and 10% to #3, which is in direct proportion to the dollar investment they had at risk.
The only topics left open are determining how much is a fair reimbursement for the work of maintaining the property and whether or not the rent was fair or needs to be adjusted. You can get both questions answered by any professional real estate management firm in the area.
Good luck!
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#3 written by saberhilt 1 year ago
Were investor 1 and 2 compensated for their maintenance work during the ownership period?
Did investor 1 have a reduced rent during the ownership period?
How was the cashflow from the property divided?
Investor 3 paid 1/10 of the cost, so provided there was compensation for maintenance during the period of ownership, he should get 1/10 of the profit.
Investor 2, 30%.
Investor 1, 60%. if he had bought a home by himself and it had apprciated, he’d be entitled to that appreciation.
Whatever you do, get a lawyer (out of the profits) to draw up the paperwork and have each of you sign the agreement.
Now if there was no compensation for the maintainence and investor 1 paid market level rents during the ownership period, then working in a back pay formula would be useful.
Caluculate an hourly rate for maintainence work. How big was the property? Duplex, 4-, 8-, 60 unit apt building? Find an average number of hours spent on maintainence per week and pay 1 and 3 appropriately. Then you can split the investor profits evenly.
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#4 written by Star 1 year ago
Since Investor #1 paid rent and primarily maintained the home, it would be split like this
$ 250,000 purchase price; profit is 75,000 (I assume you have already taken the maintenance out of this)
Investor #1 paid $ 150,000 / $ 250,000 = 60% of $ 75,000 profit = $ 45000
Investor #2 – paid $ 75,000 / $ 250,000 = 30% of $ 75,000 = $ 22500
Investor #3 – paid $ 25,000 / $ 250,000 = 10% of $ 75,000 = $ 7500If you haven’t taken out the maintenance, then you need to deduct the cost of maintenance out of the profit and pay each of the parties back for the maintenance they paid. Keep in mind that investor #1, as a renter, would normally have had to maintain the property but I’m assuming that he did more than just “maintain” the property.
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I would agree with Star in the facts that were stated by you. When going in with someone else on investment of real estate, always have everything decided at the beginning of the process. It doesn’ matter if its you and relatives, every partner needs to know everything before so there is no way for a lawsuit to incur. Not in this case, but if there was a lawsuit, you could not only end up with no profit, but the property would be gone too. Which in the long run could seriously hurt your credit.
Think Twice and a agein before doing this again. Save everyone the headache in advance.