How much percentage ownership should I have?

[Haroon Tauqeer]

Hi! New member here. I had a question and wanted to gauge the community here. My friend, who I have been flipping homes with for the past 5 years, wants to buy a rental property. The situation is that he will provide the downpayment while I sign on to the mortgage since my income and credit meets the mortgage. I don't have any cash stakes in this deal. Just that the mortgage will be under my name. My friend will take care of everything else. However, we are agreeing that I will still have a percentage ownership in the home since I will have the risk of holding the mortgage under my name.

My question is this: what is a fair percentage that I should propose given that I will be holding the mortgage but no cash investment? If you can justify your response, that would be awesome. Thanks in advance everyone!

[Jason Wray]

Haroon,

It all depends on how much you value your positon being that you are using your "good credit" and your ability to show income to qualify.  What are the end goals flip propertty and make some cash, long term hold and collect rents and split future equity in property?  Establish a partnership ahead of time and put it in writing/contract 50/50 60/40 70/30...

[Theresa Harris]

You do have cash stakes in the game.  The mortgage is in your name.  What happens if they stop paying the mortgage or don't pay the property taxes?  When you do the title, a certain percent of the house will be in your name and this will affect your income taxes. 

[Bill Brandt]

If you’ve been flipping home for the last five years, put down half the money and split it 50/50. If the downpayment is at least 20-25% (this is a rental right? You have almost zero risk as prices would have to crash 15-20% before you would only break even. BUT, this will probably prevent you from buying a primary home for yourself or any rentals in your own name. As you will have all the debt and no income. 

I can’t think of a good way except you putting down half. If it’s supposed to be short term I GUESS you could ask for 5% plus 5% more every year the mortgage is in your name? That should be a good incentive for them to get your out of the mortgage. But you might also hit a point where your partner realizes they’re never going to be able to pay off your mortgage and they’re going to lose the deal anyway, so why not walk away?

What’s you’ve described is pretty much a lose lose deal? Unless you can go 30 years without buying any more properties? If so then maybe just ask for 1/2 the banks interest in top? If the banks charging 5% you charge 2.5% and just get half the interest on bank statement?

[Haroon Tauqeer]

Quote from @Bill Brandt:

If you’ve been flipping home for the last five years, put down half the money and split it 50/50. If the downpayment is at least 20-25% (this is a rental right? You have almost zero risk as prices would have to crash 15-20% before you would only break even. BUT, this will probably prevent you from buying a primary home for yourself or any rentals in your own name. As you will have all the debt and no income. 

I can’t think of a good way except you putting down half. If it’s supposed to be short term I GUESS you could ask for 5% plus 5% more every year the mortgage is in your name? That should be a good incentive for them to get your out of the mortgage. But you might also hit a point where your partner realizes they’re never going to be able to pay off your mortgage and they’re going to lose the deal anyway, so why not walk away?

What’s you’ve described is pretty much a lose lose deal? Unless you can go 30 years without buying any more properties? If so then maybe just ask for 1/2 the banks interest in top? If the banks charging 5% you charge 2.5% and just get half the interest on bank statement?

Hey Bill! Thanks for the extremely detailed reply. I really do appreciate it. I think you may have made assumptions based on some lack of information. I probably should have added more detail to my post. My income from my day job is quite high plus my wife's income also helps whereI can buy more properties. As a matter of fact, I own a primary home and a rental property already to myself. And this existing property to which im referring to is also flip which I also own under my name. 

So basically the current house in question is an existing flip between the both of us. We have already gone 50/50 (I paid the downpayment plus carrying costs while he paid for all labour and materials - he's the handy one). However, he wants to buy me out ( he will pay back my costs plus my profit based on the listed sales price). He has the capital to do this. However, what he doesn't have is high enough income to show (on paper) that he can afford the home. His reason for buying the property is that he wants to have a rental to himself while he can take advantage of the 3.5% interest rate on the property. And yes, he wants to hold the property long term. The rental market here in Hamilton, ON is quite promising. He can rent out top and bottom floors and be netting an estimated $1200 profit per month. So I'm not worried about him not making the payments. And if he does stop making payments, I can stipulate in contract that I have the right to sell the property (given the property stays under my name).

I like the offer because i get back all my initial investment plus my share of the profit. I can use this money to buy another property when I move to the US as my primary. I am not sure if the added information changes your answer. Basically, how much percentage of the property should I keep? How much is my risk worth?

[Haroon Tauqeer]

Quote from @Theresa Harris:

You do have cash stakes in the game.  The mortgage is in your name.  What happens if they stop paying the mortgage or don't pay the property taxes?  When you do the title, a certain percent of the house will be in your name and this will affect your income taxes. 

 Thanks Theresa! That makes sense. So if they stop paying the mortgage/property taxes, I can stipulate in contract that I can sell the property or take ownership. Understood about income taxes. So how much would you say is a fair percentage that represents what I'm offering "good credit, risk owning a mortgage, income tax"?

[Haroon Tauqeer]

Quote from @Jason Wray:

Haroon,

It all depends on how much you value your positon being that you are using your "good credit" and your ability to show income to qualify.  What are the end goals flip propertty and make some cash, long term hold and collect rents and split future equity in property?  Establish a partnership ahead of time and put it in writing/contract 50/50 60/40 70/30...

 Hey Jason! Thanks for the reply! If you see my response to Bill in this thread I am simply offering my "good credit" as you mentioned. End goal is that this property becomes a rental property but not my rental property. It would be my friend's property and he will manage all the income. I already own the property. He just wants to buy me out (costs + profit) but still have me own the mortgage given it's 3.5% and that he doesn't have enough income on paper. I want to be completely hands off. For me the goal is to own a percentage of the entire property because I'm offering good credit and holding risk by owning a mortgage. So when it comes time to sell or if he wants to buy me out officially in the future, I will be given the percentage based on the total value of home. The plan is not to sell for at least 5 years. Of course we will have everything in writing, but I'm trying to gauge how much percentage of the total home should I own.

[Sergey A. Petrov]

I don’t see this as an equity position. You are essentially selling and owner financing. No need to hold on to the property (with liabilities and taxation attached). If the bank is 3.5%, your rate is say 5.5%, and you keep the difference 

[Bill Brandt]

@Haroon Tauqeer

The problem is that debt will show on your DTI but the income won't. So it will hurt your ability to get future loans. That was one of my points.

[Haroon Tauqeer]

@Sergey A. Petrov can you expand on this please? Are you saying I collect 2% every month?

[Haroon Tauqeer]

Quote from @Bill Brandt:

@Haroon Tauqeer

The problem is that debt will show on your DTI but the income won't. So it will hurt your ability to get future loans. That was one of my points.

I'm not worried about my DTI here. I'll still be able to get future loans.

[Bill Brandt]

Cool, as long as you don’t plan to get 9 more mortgages in the next 30 years or at least until they pay it off you’re set. Just ask for an escalating “fee” so eventually they pay it off. 

[Sergey A. Petrov]

Quote from @Haroon Tauqeer:

@Sergey A. Petrov can you expand on this please? Are you saying I collect 2% every month?

Yes, you get a bank loan / mortgage at 3.5%. You charge your partner/buyer 5.5%. Your partner buying you out makes monthly payments to you as if it were a 5.5% mortgage. You make your monthly payments to the bank that are based on a 3.5% mortgage. The difference is your to keep to compensate you for your efforts and the risks you’ll be taking on 

[Theresa Harris]

Quote from @Haroon Tauqeer:

Quote from @Theresa Harris:

You do have cash stakes in the game.  The mortgage is in your name.  What happens if they stop paying the mortgage or don't pay the property taxes?  When you do the title, a certain percent of the house will be in your name and this will affect your income taxes. 

 Thanks Theresa! That makes sense. So if they stop paying the mortgage/property taxes, I can stipulate in contract that I can sell the property or take ownership. Understood about income taxes. So how much would you say is a fair percentage that represents what I'm offering "good credit, risk owning a mortgage, income tax"?

 I don't know what a good percentage is as I don't know how much you are risking.  Definitely put a statement in about missed payments.  Also a timeline and late fee.  Eg if any mortgage payments are late, you get $X in addition to the full payment within 7 days and they are only allowed X late payments.  Any payment not paid within 8 days, means you take over and can sell the property.  Then state what they get.  If they have the deposit-do they get it all back minus closing costs or if the house sells for less than you bought it, do they also lose some of their money?  Does all of the loss come from their down payment, or only part of it?  These are things you need to think about.

[Haroon Tauqeer]

Quote from @Theresa Harris:

Quote from @Haroon Tauqeer:

Quote from @Theresa Harris:

You do have cash stakes in the game.  The mortgage is in your name.  What happens if they stop paying the mortgage or don't pay the property taxes?  When you do the title, a certain percent of the house will be in your name and this will affect your income taxes. 

 Thanks Theresa! That makes sense. So if they stop paying the mortgage/property taxes, I can stipulate in contract that I can sell the property or take ownership. Understood about income taxes. So how much would you say is a fair percentage that represents what I'm offering "good credit, risk owning a mortgage, income tax"?

 I don't know what a good percentage is as I don't know how much you are risking.  Definitely put a statement in about missed payments.  Also a timeline and late fee.  Eg if any mortgage payments are late, you get $X in addition to the full payment within 7 days and they are only allowed X late payments.  Any payment not paid within 8 days, means you take over and can sell the property.  Then state what they get.  If they have the deposit-do they get it all back minus closing costs or if the house sells for less than you bought it, do they also lose some of their money?  Does all of the loss come from their down payment, or only part of it?  These are things you need to think about.

 Thanks so much Theresa! The amount I would be risking is $800K at 3.5%. Comes out to about 3500/month + ~$3000 in property taxes. All those things you mentioned, I appreciate it!

[Zach Lemaster]

I always think a 50/50 split is most appropriate and easiest to coordinate.  Quite alright if one person brings the deal and the other brings the capital.