Author Topic: Co-ownership investment - what to anticipate  (Read 4652 times)

Mae80s

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Co-ownership investment - what to anticipate
« on: August 10, 2015, 01:49:24 PM »
Hello Mustachians! I tried to search to see if this had been covered before, but I didn't find anything.

Basically, I'm in the midst of buying a condo with my brother. He'll live in it (and rent out the other room) and pay the mortgage, taxes and condo fees. I am contributing 10% of the down payment. He's putting in another 10%. Both our names will be on the mortgage and the title.

It's very highly unlikely that I will ever need to live here, as it's in a part of the country (BC, I live in Ontario) where I haven't lived for years and where there's few jobs in my field. This is purely an investment on my end.

I've been researching writing up a co-ownership agreement and getting it notarized. My brother and I will sign it.

Initially, we said  he would pay the mortgage, condo fees and taxes and collect any rents for the other bedroom. When the time comes for him to buy me out (or if we sell together) I would get 50% of the increase in the equity but not the principle paydown on the mortgage.

Now I'm wondering if this is fair. What do you guys think?

We'll also be covering these topics in the agreement:

- Outline each of our "co-ownership interest" in the property.
- If my brother can't make the mortgage payment. I'll cover it for three months. After that it will be rented out.
- How to proceed if/when one of us wants to be bought out.
- Distribution of operating expense payments and revenue. Agree to prepare an annual operating budget for expenses arising from the property, such as: Property transfer tax in connection with the acquisition of the property. Legal fees in connection with the acquisition of the property
- Property taxes and assessments fees
- Property insurance payments
- Strata corporation maintenance fees and any extraordinary fees
- Electricity and telephone charges
- Expenses for maintenance resulting from normal wear and tear
- If being rented, distribution of all revenue and income generated by the rental of the property
- Distribution of property repairs and improvement expenses. For example:
Will repairs be carried out only as agreed by all parties except in the case of an emergency? And, how are emergency repairs paid for?
Will property improvements be done only by agreement from all parties?
- Accounting, bill payment and management

What else should be in here?
« Last Edit: August 10, 2015, 01:53:02 PM by Mae80s »

iris lily

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Re: Co-ownership investment - what to anticipate
« Reply #1 on: August 10, 2015, 01:57:44 PM »
Tagging to follow

Mae80s

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Re: Co-ownership investment - what to anticipate
« Reply #2 on: August 10, 2015, 02:05:12 PM »
Oh and my little bro is very frugal. He's 24 and saved up $30K in only a couple of years.

He has okay credit, but as he only has one credit card on his report (has only had it for a year),  the bank wanted someone else to co-sign with him.

Otherwise, I wouldn't have my name on the mortgage, just the title.

iris lily

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Re: Co-ownership investment - what to anticipate
« Reply #3 on: August 10, 2015, 02:14:25 PM »
I guess my primary question is: why are you contributing to this purchase?mwhats your primary reason?


Mae80s

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Re: Co-ownership investment - what to anticipate
« Reply #4 on: August 10, 2015, 02:26:44 PM »
I guess my primary question is: why are you contributing to this purchase?mwhats your primary reason?

I've been living in high COL areas (and I don't anticipate this changing in the next 5 years), and this has meant that I'm priced out of owning, but have been saving about 50% of my paycheque for awhile.

I want to diversify my investments and get on the property ladder.


iris lily

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Re: Co-ownership investment - what to anticipate
« Reply #5 on: August 12, 2015, 09:55:13 AM »
I'm sorry you aren't getting more traction on this thread. I tagged it because I've been having a similar discussion with a couple of other people about sharing down payment and then how to divide up perceived profits.

I honestly don't have much to add to this since there are many ways to slice and dice this deal, but I would consider these points:

What happens if the property value goes down? You seem convinced it will not. A lot of people thought the same thing just before the bubble burst in 2008.

What happens when one or both of you get married?how does that change the legal environment?

I don't understand how the mortgage holder will simply remove you from the mortgage when you want out. I have been curious as to how that works and I hope someone chimes in on this point. For instance if you want out in three years, will your brother be able to re finance?



Bruinguy

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Re: Co-ownership investment - what to anticipate
« Reply #6 on: August 12, 2015, 11:15:54 AM »
Wow, this is going to be complicated!  If it were me, I would want to keep the ownership separate from the rental.  So, for your brother's payments for renting the room, I'd come up with a fair rent number.  Rent would go into the partnership to pay expenses (mortgage, insurance, property tax, HOA).  As a renter, he would be responsible for electricity, etc., with the roommate.  If rent from both rooms is not covering the partnership expenses, then you have to decide who pays in more and how that affects distributions of profits.

On the framework you outlined, in considering how proceeds are allocated upon a sale, I'd also consider what happens if the sale price is below purchase price.  Let's assume the purchase price is $100; that you each put $10 down; and there was an initial mortgage for $80.  Five years down the road, your brother has paid off $15 of the mortgage and $65 remains. 

If the house is sold and for less than $65, who is going to have to come out of pocket to pay off the remaining balance on the mortgage?

If the house is sold and for $75, who gets the $10?  Does your brother get it as a partial return of his principal payments?  if so, do you owe him anything for the principal payments that he didn't get reimbursed?

Mae80s

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Re: Co-ownership investment - what to anticipate
« Reply #7 on: August 12, 2015, 11:56:38 AM »
I'm sorry you aren't getting more traction on this thread. I tagged it because I've been having a similar discussion with a couple of other people about sharing down payment and then how to divide up perceived profits.

I honestly don't have much to add to this since there are many ways to slice and dice this deal, but I would consider these points:

What happens if the property value goes down? You seem convinced it will not. A lot of people thought the same thing just before the bubble burst in 2008.

What happens when one or both of you get married?how does that change the legal environment?

I don't understand how the mortgage holder will simply remove you from the mortgage when you want out. I have been curious as to how that works and I hope someone chimes in on this point. For instance if you want out in three years, will your brother be able to re finance?

Yeah, I was hoping to get more replies as well. You raise good points about the property decreasing in value. It could happen and I should plan for all possibilities. Will have to include that in our agreement (and think of a solution for both of us)

Being up in Canada, I'm technically 'married' now, as I've been common-law with my partner for three years (living together) ... again, another good thing to put in this agreement. That our current partners/future partners are not part of this agreement. I'm not sure how that would be legally enforced, but I will have to find out.

Refinancing/buying out ... still doing homework on this. I had really, really hoped not to have to see a lawyer for drafting this, but I think it will be necessary, unfortunately.

Wow, this is going to be complicated!  If it were me, I would want to keep the ownership separate from the rental.  So, for your brother's payments for renting the room, I'd come up with a fair rent number.  Rent would go into the partnership to pay expenses (mortgage, insurance, property tax, HOA).  As a renter, he would be responsible for electricity, etc., with the roommate.  If rent from both rooms is not covering the partnership expenses, then you have to decide who pays in more and how that affects distributions of profits.

On the framework you outlined, in considering how proceeds are allocated upon a sale, I'd also consider what happens if the sale price is below purchase price.  Let's assume the purchase price is $100; that you each put $10 down; and there was an initial mortgage for $80.  Five years down the road, your brother has paid off $15 of the mortgage and $65 remains. 

If the house is sold and for less than $65, who is going to have to come out of pocket to pay off the remaining balance on the mortgage?

If the house is sold and for $75, who gets the $10?  Does your brother get it as a partial return of his principal payments?  if so, do you owe him anything for the principal payments that he didn't get reimbursed?

All good points. Thanks for the input. Especially about keeping the rental separate from the ownership.

lostamonkey

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Re: Co-ownership investment - what to anticipate
« Reply #8 on: August 12, 2015, 12:14:08 PM »
Wow, this is going to be complicated!  If it were me, I would want to keep the ownership separate from the rental.  So, for your brother's payments for renting the room, I'd come up with a fair rent number.  Rent would go into the partnership to pay expenses (mortgage, insurance, property tax, HOA).  As a renter, he would be responsible for electricity, etc., with the roommate.  If rent from both rooms is not covering the partnership expenses, then you have to decide who pays in more and how that affects distributions of profits.

On the framework you outlined, in considering how proceeds are allocated upon a sale, I'd also consider what happens if the sale price is below purchase price.  Let's assume the purchase price is $100; that you each put $10 down; and there was an initial mortgage for $80.  Five years down the road, your brother has paid off $15 of the mortgage and $65 remains. 

If the house is sold and for less than $65, who is going to have to come out of pocket to pay off the remaining balance on the mortgage?

If the house is sold and for $75, who gets the $10?  Does your brother get it as a partial return of his principal payments?  if so, do you owe him anything for the principal payments that he didn't get reimbursed?


I don't think this is a good investment but I agree that this would be the best way to structure it. The "partnership" owns the property, collects all rents and pay all expenses. Your brother is a "tenant" and pays fair market rent to the partnership.

Mae80s

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Re: Co-ownership investment - what to anticipate
« Reply #9 on: August 12, 2015, 12:40:51 PM »
Why do think this isn't a good investment, lostamonkey?

The apartment is in Victoria, B.C and priced to sell.

lostamonkey

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Re: Co-ownership investment - what to anticipate
« Reply #10 on: August 12, 2015, 12:58:34 PM »
Why do think this isn't a good investment, lostamonkey?

The apartment is in Victoria, B.C and priced to sell.

For a few reasons:

1. Given that it is in Victoria, BC, odds are it isn't cash flow positive. If you post estimated rents and expenses (including vacancy and maintenance), I will be able to give a better opinion.

2. I would not count on equity appreciation. Many people think Canadian real estate is a bubble and I would not count on appreciation.

3. Renting to a family member can cause all sorts of issues. Firstly, he may not be willing to pay fair market rent. Second, it will be next to impossible to evict him if he stops paying. Thirdly, he will probably expect extra privileges because he is a owner such a late payment of rent, being very choosy as to his roommate, etc.

jooles

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Re: Co-ownership investment - what to anticipate
« Reply #11 on: August 12, 2015, 01:27:37 PM »
Plan for how things could go sideways.  If you want your money back out, but your brother wishes to keep the property what happens then? 

If your brother has a health crisis and cannot work or pay bills, what happens then? 

If your brother falls in love and gets married and needs a big house for all the new babies, what happens then?

Here's a scenario from a shared ownership I've been following lately.

Two unrelated folks buy into a condo 50/50 cash for the purchase price.  One is just an investor, one is the occupant of the property.  Real estate market crashes, values go waaay down (like almost 50%).  Now both are holding property worth half what they paid for it.  Occupant falls in love and moves closer to new love (many hours away).  Both owners agree to rent property.  Thankfully rent does cover all expenses (homeowner's dues and taxes) and each owner gets a check for $300/mo after the expenses are deducted from the incoming rent checks.  Now former owner occupant falls on hard financial times and wants to move back into condo.  He used to live there rent free and wants to do that again.  But now the other owner is used to having the expenses covered by the renter and getting $300 each month.  The non occupant investor owner wants to maintain her cash flow, the occupant owner doesn't understand the request to pay $300/mo to the other owner. 

Friends or no friends, family or not, business is business.  Write up a contract.  Investigate how true investors would view this situation.  Have a plan for your exit strategy.  The liklihood of trouble on this path is very high.

totoro

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Re: Co-ownership investment - what to anticipate
« Reply #12 on: August 13, 2015, 09:29:44 AM »
Yes, VanCity has a free co-ownership agreement and offers a mixer mortgage for co-owners.  Google "mixer mortgage co-ownership agreement checklist" https://www.vancity.com/Mortgages/TypesOfMortgages/MixerMortgage/

You are talking about a condo in Victoria, where I live, that is priced to sell.   It is very unlikely this investment will be cash flow positive. 

Also, why is it priced to sell?  Are rentals permitted?  Are there age restrictions?  Have you viewed the strata council minutes and the financials of the building? 

Mae80s

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Re: Co-ownership investment - what to anticipate
« Reply #13 on: August 13, 2015, 11:15:05 AM »

Also, why is it priced to sell?  Are rentals permitted?  Are there age restrictions?  Have you viewed the strata council minutes and the financials of the building?

Rentals are permitted, no age restrictions .... the financials of the building are in sound order. It's priced to sell because the current owner needs return to Europe because of a family situation. Was going to be leaving eventually, but this situation has accelerated the process.

Thanks jooles and lostamonkey too. Appreciate all the feedback here. Really want to do my research and go into this with my eyes open. It's not 100% done yet.

totoro

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Re: Co-ownership investment - what to anticipate
« Reply #14 on: August 13, 2015, 11:52:42 AM »
Have you reviewed the minutes and the mandatory depreciation report that sets out any deferred maintenance.  There are a number of leaky condos and condos with deferred maintenance in Victoria. I'd also suggest you might wish to contact Marko Juras of Fair Realty for his opinion.  He would likely provide it for free or a small fee and he is knowledgeable about most of the buildings.

OneDollarAtATime

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Re: Co-ownership investment - what to anticipate
« Reply #15 on: August 13, 2015, 09:40:11 PM »
Wow, this is going to be complicated!  If it were me, I would want to keep the ownership separate from the rental. 

I agree with keeping this separate.  Reason being, if you want to take out another loan for another property / investment, your debt to equity ratio won't be as high since the property won't be tied to your name.


curlyfry

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Re: Co-ownership investment - what to anticipate
« Reply #16 on: August 15, 2015, 07:13:03 PM »
I agree there are far too many ways this can get complicated.  There are ways to diversify that carry less risk of complications.

I am a fellow Victoria resident that keeps a close eye on MLS (& If you want to share what building it is, I'd be interested in knowing, as I  may be able to give some input!)  There are a LOT of condos in Victoria that are priced to sell.
 

ahoy

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Re: Co-ownership investment - what to anticipate
« Reply #17 on: August 16, 2015, 12:53:14 AM »
I really can't contribute much.  However, I do agree with a poster above about keeping the ownership and your brothers rent separate. 
I have  bought a couple of investment properties with my brother.   It's easy to work with him as he's flexible and easy going.   I wouldn't be doing this with any other family member.   We have no mortgages (I know we should), but we bought in the recession and there was no way we were going to get any loan.   My brother has recently separated from his wife (we always knew that this could be a possibility).   We shall see how this plays out... as his ex will want everything and more!

Goldielocks

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Re: Co-ownership investment - what to anticipate
« Reply #18 on: August 16, 2015, 01:30:26 AM »
How it works for my motherin law and SIL.

Ten percent down, cash, plus pay ten percent of ppty taxes.  Pay ten percent of upgrades or maintenance over $2000, mutually agreed.

SIL can do what she like for rentals and is responsible for full mtg payment, repairs, and utilities.

Upon sale, 10% of sale price, net of fees, is paid to MIL.

I.e. like a silent investor in real estate.  All leverage risk or gain is to SIL with mortgage for her share.

That was the plan, it got messed up.  Any added cash or pay from MIL over the years,  added to her share percentage at an agreed rate at that time.  Having a written plan to force a sale  or buy out is a good idea.