What is a good formula for splitting profits on a rental property investment?
I am involved in a 3-way investment on a leasing 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 accurate family members, we weren’t too concerned about figuring this out we bought the property.
I would really be grateful for 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 leasing property management.
Investor #2:
Invested $75,000 from a home equity line of credit.
Did 0% of the maintenance, improvements and leasing property management.
Investor #3:
Invested $25,000 from a home equity line of credit.
Did 15% of the maintenance, improvements and leasing property management.
Thank you!
legally it may possibly be a even 3 way split
Since Investor #1 paid rent and primarily maintained the home, it would be split like this
$250,000 hold 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 = $7500
If you place of protection’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.
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 covenant.
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 huge was the property? Duplex, 4-, 8-, 60 unit apt building? Find an mean number of hours washed-out on maintainence per week and pay 1 and 3 appropriately. Then you can split the investor profits evenly.
First, I’ll assume that the rent paid by #1 was honest market value rent. If it was less, then what I’m vacant to recommend should be adjusted accordingly.
If you figure out how much it would have cost to have the property maintained by someone else, you can place a dollar figure on the maintenance, improvements, and property management. That’s usually about 10-15% of the honest 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 even as 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 preside over proportion to the dollar investment they had at risk.
The only topics left open are determining how much is a honest reimbursement for the work of maintaining the property and whether or not the rent was honest or needs to be adjusted. You can get both questions answered by any professional real estate management firm in the area.
Excellent luck!
I would agree with Star in the facts that were stated by you. When vacant in with someone else on investment of real estate, always have everything chose at the beginning of the process. It doesn’ topic if its you and relatives, each 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 may possibly not only end up with no profit, but the property would be gone too. Which in the long run may possibly seriously hurt your credit.
Reckon Twice and a agein before dependability this again. Save all the headache in advance.