Two owners of triplex. One moves out. Other pays rent?
Hi BiggerPockets and fellow investors. I have been BP listener and follower for several years, however this is my first post. Currently in a predicament and not sure how to approach it. I co-own a triplex with a friend. 50/50 on everything. We both have been living in the a unit since we purchased 6 years ago. When we bought put the 20% down payment and have shared 50/50 the costs associated with property.
One owner moves out and the unit gets rented at market rate. If the rental income from two units pay off mortgage and there is a small cash flow. Should the other owner that still lives in one unit pay rent? no rent ? or Discounted rent , meaning a percentage of what it could rent for?
We made the big mistake, as many newbies like us do, to not have an initial property management agreement.
Appreciate any insight from our BP community! Thank you in advance!
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Quote from @Ivan Santacruz:
Hi BiggerPockets and fellow investors. I have been BP listener and follower for several years, however this is my first post. Currently in a predicament and not sure how to approach it. I co-own a triplex with a friend. 50/50 on everything. We both have been living in the a unit since we purchased 6 years ago. When we bought put the 20% down payment and have shared 50/50 the costs associated with property.
One owner moves out and the unit gets rented at market rate. If the rental income from two units pay off mortgage and there is a small cash flow. Should the other owner that still lives in one unit pay rent? no rent ? or Discounted rent , meaning a percentage of what it could rent for?
We made the big mistake, as many newbies like us do, to not have an initial property management agreement.
Appreciate any insight from our BP community! Thank you in advance!
I assume you both were living there and not paying rent but paying whatever the bills are. Now that only one of you is living in the property this creates an uneven situation. Definitely write up an agreement ASAP but if it were me, I would have the person living in one of the units contribute X amount per month rent which is same as other tenants. The positive cash flow should then be agreed on how it is handled.
yes, both of you should have been paying rent to begin with. now, that the scales tipped, everything should be separated and the property itself should be viewed as its own separate entity. the owner who continues to occupy should pay market rent or move out and rent the unit at market rate to someone else. if owner occupying and paying market rate to the "property entity" you get half of it back via distributions to the two equal 50/50 partners. all expenses should flow through that separate "property entity" as well (vs. each directly paying 50%)
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- Royal Oak, MI
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#2 Managing Your Property Contributor
- Property Manager
- Royal Oak, MI
@Ivan Santacruz actually you need a partnership agreement.
When partnering with anyone, but especially family & friends, you want everything in writing. Otherwise, you may not be welcome at family events!
Too many investors want to partner with “handshake agreements”, which they would never do with a tenant or property management company.
Things to think about:
1) What happens if one of you is suddenly incapacitated or dies? Do the surviving partners get that investors shares or do they have to deal with relatives that may be ignorant and/or greedy?
2) What happens if one of the partners wants to terminate the business relationship and wants their investment out now?
3) What happens if one of you drinks & drives, killing someone and getting sued by the victim's family? How would the other partner(s) be protected from that?
So, why wouldn't you want to hire an attorney to create a partnership agreement and perhaps an LLC to cover as much of the above as possible?
