Author Topic: How to calculate Dividing Gains with Parents' Downpayment  (Read 1842 times)

ben4prez

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How to calculate Dividing Gains with Parents' Downpayment
« on: August 07, 2015, 08:18:17 AM »
Mustachians -

First time poster, long time reader.

My wife and I are about to sell a condo in Hawaii, and we're trying to figure out how to appropriately and fairly distribute whatever gains we may get from the sale between us and her parents.

When she bought it, my wife's parents paid the downpayment, and she / we have been covering the costs of everything else since, including the mortgage, improvement, insurance, etc.  Hawaii also has this crazy thing called a lease-hold which we are about to purchase in cash.  We've also had renters the last few years which we've been cash-flow negative on. 

I'll put the numbers below, but bottom line is we're trying to figure out the fairest distribution of the potential gains from the property, to include figuring in the time-value of money.  Disregarding the wisdom of buying the place in the first place (that one has been beaten to death by us...) what are your recommendations?

Bottom Line Numbers

Bought in 2009 for 195,000 (With a lease hold)
Parents put 40k down.  Other closing costs were either credited or rolled into the loan.

Wife lived there for two years, putting in about 20k of improvements and paying the mortgage / HOA and lease-rent fees which totaled around $2500 / month.  She occasionally had roommates which helped with the rent.

We've been renting it since 2012 -- rent was 2k from 2012 - 2014.  Raised to 2200 for this year.  Expenses are now about 2600 / month + occasional maintenance (which is why we are unloading it!)

We are also purchasing the lease for 140k cash (to expedite ownership), bringing the total basis up to 335000

We can probably get about 480k for it once we buy the lease-hold and it is a normal fee-simply transaction (think normal US property ownership).

Basic answer we've run down is this:

Figure out how much we've put into the condo (net of rents), and how much the parents put in and get a percentage and divide up proceeds that way.  However -- should we add an interest rate to the parents' contribution since it's just been sitting there for 6 years?  Should we add in the cost of our time in managing the place (which has been a headache)?

This will not cause a rift between our families either way...but we want to be fair.

Any help/thoughts much appreciated!
ben

KCM5

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Re: How to calculate Dividing Gains with Parents' Downpayment
« Reply #1 on: August 07, 2015, 08:28:09 AM »
Did her parents look at this like an investment?

I'd just return the $40k with interest. Something like 8%/yr would be about $63k, 4% would be $51k.

I'm assuming they gave your wife the money because they wanted to help out their child, not invest in property in Hawaii. They may not even want the money or the interest. Have you spoken with them about it?

monarda

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Re: How to calculate Dividing Gains with Parents' Downpayment
« Reply #2 on: August 07, 2015, 08:45:48 AM »
Did her parents look at this like an investment?

I'd just return the $40k with interest. Something like 8%/yr would be about $63k, 4% would be $51k.

I'm assuming they gave your wife the money because they wanted to help out their child, not invest in property in Hawaii. They may not even want the money or the interest. Have you spoken with them about it?

I'm agreeing with KCM5.
Did her parents use the condo at all? If they wanted to get benefit themselves from it (versus a gift or investment), I think they'd have come for lots of visits.  I would ask them.

$40K with interest is reasonable.
What kind of amount will you take home at closing if you sell for $480K?
that is to say, what amount are you talking about splitting?


forummm

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Re: How to calculate Dividing Gains with Parents' Downpayment
« Reply #3 on: August 07, 2015, 08:52:32 AM »
Sometimes parents just give their kids money for a down payment because they're trying to help them out. Do they even want the money back?

ben4prez

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Re: How to calculate Dividing Gains with Parents' Downpayment
« Reply #4 on: August 07, 2015, 09:12:24 AM »
I think my mother in law had a dream of one day retiring to Hawaii and thought this would be a foothold -- and they also wanted to help their daughter out. Its more of them needing their money back (although they havent said as much, they just haven't been the most diligent in saving for retirement)...We do need to talk to them to discuss what they expect back.  Sounds like the downpayment + reasonable interest will be the easiest / best route.

appreciate the replies!