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!
William H
March 31, 2010 at 9:54 pm
If the Department of Transportation is involuntarily converting your property, then you are eligible under section 1033 of the tax code to buy similar use property and not pay any taxes.
Sean M
March 31, 2010 at 10:43 pm
Profits based on pre arrangments made at time of investments.
Normally 1/3 each, after costs are settled.
Profts are divded after all actual costs involved. So first, all receipts must be settled. Investor 1, and even 2 and 3 may have made payments necessary (preferrably as agreed), and will be paid off.
Investor one received quid pro quo benefits by living at the site and in turn was responsible for a degree of on site presence (such as overall supervision and being on site daily). But investor 1 is entitled to receive compensation for actual trade work at a rate prearranged to. Some people would say that investor one should not get a bigger cut, and they would be right. But investor one can file a receipt for payment of actual work (such as building something, or doing certain specific measurable jobs, like laying tile, carpentry, even painting). Cleanings, supervising, worrying, running errands, grappling with issues, and being a hero do not count as tangible work, unless pre-arranged to as the “general contractor” payment.
bigoilman
March 31, 2010 at 11:10 pm
This actually isn’t that tough. The three of you should place the property into an Equity Holding Land Trust. All 3 investors show their respective monetery investment as contributions to the trust. Those contributions are paid back in full when the trust is terminated (i.e. when the property is sold).
Then you have to spell out in the trust documents, what percentage of profits each investor is entitled to at termination. If a 33.333% equal, 3-way split won’t satisfy all parties, you’re gonna have to come to some agreement on each investor’s percentage of profit.
I assume since you asked this question, you’re wanting a legally binding way to arrange this rather than just counting on your partners to “do the right thing”. A land trust is the tool designed for this.
Check out http://www.landtrust.net or my website below.
As for the breakdown of payouts I’d suggest:
Investor #1 – 70%
Investor #2 – 15%
Investor #3 – 15%
HTH
Genki
March 31, 2010 at 11:32 pm
Here’s how to figure it:
1. It does not matter from where each investor got their investment capital. It does not matter if they got it from home equity loan, line of credit, or cash in their mattress.
2. That Investor 1 rented the property is irrelevant because you said he paid rent. You indicated “rent” in quotes so I think you’re saying that he paid rent by performing 85% of the maintenance, improvement, and management.
a. If that is correct, then it’s an even exchange.
b. If that’s not correct, determine the difference between the value of the rental and the value of the work he did. If he is owed money, add it to his payout. If he owes money, subtract it from his payout.
3. Investor 3 did 15% of the management. Determine the value. This will be added to his payout.
4. Next, determine the percentage of capital contribution. The total invested was $250,000, so:
Investor 1 contributed $150,000 = 60%
Investor 2 contributed $75,000 = 30%
Investor 3 contributed $25,000 = 10%
5. From the $75k gross profit, add/subtract the rent and management expenses you determined in #2 and #3 above. This is the “net profit.”
6. If Investors 1 and 3 are owed for their work, pay them.
7. Allocate the net profit according to the percentages in #4.
For example, if the net profit is $70,000, then Investor 2 is owed 30% x $70k = $21,000.
Easy!
justlilolme
March 31, 2010 at 11:35 pm
Ok, as far as splitting the $75,000 profit it goes like this:
Investors #1 and #3 should be paid for maintenance, property management etc. before the remainder of the 75K is divvied up. Typically, at least in my area, the fee for property management is 10%. So using that figure as a rule of thumb. Take the 10% ($7,500) off the top, leaving $67,500.
#1 and #3 do a 85/15 split of the $7,500 #1 gets 85% of that amount which = $6,375 and #3 gets 15% which = $1,125
Now the remainder ($67,500) is split this way, Investor #1 gets 60% since he (or she) contributed 60% of the initial investment which = $40,500. Investor #2 gets 30% since he (or she) contributed 30% which = $20,250 and investor #3 gets $6,750 or 10% since he (or she) contributed 10% of the initial investment.
Now do the math, $75,000 – $7,500 = $67,500
$40,500 + $20,250 + $6,750= $67,500
Any fees or incidental expenses incurred in the sale or transfer of ownership should be split using the same percentages #1 pays 60%, #2 pays 30% and #3 pays 10%
and as far as my tip goes, work it out amongst ya hahaha LRF_816@yahoo.com
james m
March 31, 2010 at 11:45 pm
First,each party should get their initial investment + the money spent on improvements.The labor on the improvements should not be a factor because the one who lived there benefited from the improvements and maintenance. (unless you really want to split hairs).The bottom line is I would just consider the money,and not the time and labor.If you try to factor in the labor,it is going to cause a family feud.