Sharing equity with tenants?

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Sharing equity with tenants?

Jay Y.
Real Estate Agent · Atlanta, GA · Member since 2012 · 134 posts · 22 votes

Hi all,

Just thinking out loud here but would anyone of you consider sharing some equity with your tenants?  I'm coming from the angle that I'm a lazy landlord who doesn't want to deal with maintenance calls and I hate turn over.  I'm thinking one way to make the tenant take pride in the home and stay in the house for 10 years is to share some equity with them...  I was thinking of giving the tenant 10% of the equity assuming prices don't collapse like 2008.  This would be accomplished by having 10% of the rent placed into a holding account and after X amount of good tenantship, the tenant could get the equity based upon how much money was put in and the current market price of the house.

I know I'm skipping a lot of details but this would be the high level approach of what this model would be like.  I hope this makes sense and if it does, would you consider doing this if you're also a lazy landlord???

Thanks!

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Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
5y

How very woke of you. 🙄🤦‍♂️

It's one of the worst ideas I've ever heard. Beyond awful. I honestly can't think of a single positive from this, but the amount of negatives are overwhelming. I'd rather set the unit on fire and burn it down to ashes on the ground than ever accept this type of arrangement. Staggeringly horrifying idea. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y

    well  I dont think you want to give equity that could be a legal nightmare but you could do a rent rebate.

    IE pay 24 months on time and month 25 is free..  something like that ???

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  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    5y

    How very woke of you. 🙄🤦‍♂️

    It's one of the worst ideas I've ever heard. Beyond awful. I honestly can't think of a single positive from this, but the amount of negatives are overwhelming. I'd rather set the unit on fire and burn it down to ashes on the ground than ever accept this type of arrangement. Staggeringly horrifying idea. 

    32Reply
  • Jeffrey Donis
    Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes
    5y

    @Jay Y. I would avoid doing this. This would pretty much open you to a partnership between someone you don't know very well. And partnerships are like marriages, so you shouldn't rush into them. They can be complicated to get out of. 

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    5y

    I personally think it's a terrible idea. I can't think of any tenants that I have, or that I've had, with whom I would have wanted to be business partners. I think you are fooling yourself if you think potentially giving tenants some ownership stake in the house will make them care for the house better or stay longer. Some of the worst homes I've bought were owner-occupied and had virtually no pride of ownership whatsoever.

    If you want your tenant to get some equity out of the deal, sell them the house on a lease-purchase option. 

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  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    5y

    @Jay Y.   It does not relieve you of maintenance responsibility.  You still have to fix the house.  A better solution would be get a PM to handle your tenant if you are lazy. 

    8Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    5y

    @Greg M. So you're saying there's a chance?

    7Reply
  • Adam Martin
    Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
    5y

    wouldn’t it be much simpler to hire a property manager 

    1Reply
  • Alex S.
    Investor · Metro East of St. Louis (Illinois) · Member since 2016 · 255 posts · 211 votes
    5y

    Outside the box thinking @Jay Y.!!  That is where innovation begins.

    That said, I wouldn't partner with anyone I didn't know very well and trust completely.  If you have that relationship with your tenants, then go for it, but it shouldn't be free.  They should have to purchase the equity.

    0Reply
  • Luke G.
    Rental Property Investor · Hammond, WI · Member since 2017 · 139 posts · 217 votes
    5y
    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Bjorn Ahlblad:

    @Greg M. So you're saying there's a chance?

    Good one Bjorn  made me laugh out loud..  

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  • Curtis Mears
    Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes
    5y

    @Jay Y.

    Not no, but hell no. You are making a tenant a partner of yours. So what happens when they move out? Are going to mail them their 10% checks. If you do not like managing properties, hire a property manager.

    1Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    Why on earth would you do that?  The only person who cares about your house is you.  Jay's idea is good if you want a longer term tenant, but make it long enough to be worth it AND always do the last month, never up front.

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    @Jay Y.

    This could work if you find the right tenant. I’ve been approached about this idea and think it could work. If the tenant has some skin in the game they’ll take better care of the property in theory. And they may stay for many years since they know their equity is going up over time vs renting elsewhere and getting nothing out of it. I’m opened minded and see this being a good possibility in the future. However, my wife doesn’t feel the same way so I’m holding off for now.

    0Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Jay Y.:

    Hi all,

    Just thinking out loud here but would anyone of you consider sharing some equity with your tenants?  I'm coming from the angle that I'm a lazy landlord who doesn't want to deal with maintenance calls and I hate turn over.  I'm thinking one way to make the tenant take pride in the home and stay in the house for 10 years is to share some equity with them...  I was thinking of giving the tenant 10% of the equity assuming prices don't collapse like 2008.  This would be accomplished by having 10% of the rent placed into a holding account and after X amount of good tenantship, the tenant could get the equity based upon how much money was put in and the current market price of the house.

    I know I'm skipping a lot of details but this would be the high level approach of what this model would be like.  I hope this makes sense and if it does, would you consider doing this if you're also a lazy landlord???

    Thanks!

     Pride of ownership May not be a reality 

    I sold a mobile home on land for $245,000 to a buyer who used a conventional loan with $90,000 down 

    The new owners live there now 

    I drove past the house 2 months later.   It Looks horrible 

    You could get someone like that and it Would only make your problems worse 

    Pay a PM that is why they exist 

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    5y
    Originally posted by @Account Closed:

    Speaking as a renter, if this were something offered to me it would totally change my outlook on the whole deal. Renting is basically a one sided money pit. A renter pays up to 40% of their salary to pay someone else’s mortgage and pay someone else’s bank account and they never get any benefit from it. That money is just wasted. 

    If I were told that the equity would be shared, and that a part of the money I’m throwing away every month was going to something and that I could someday benefit from it instead of just making someone else richer and paying their bills, it would change my whole mindset. 

    I’d have a lot more respect for the landlord for one. And I’d go out of my way for him or her. I’d do everything I could to avoid moving and I’d treat the place even better than I already treat my home. Though honestly I usually get most of my deposits back because I don’t really damage anything. But I’d actively care for a place I was building equity in. And If there’s also the option to use that equity to purchase the place, oh yes would I appreciate that. 

    Doing this would make your renter resent you a lot less because now they would be benefiting from throwing their money away every month which is all renting basically is. 

     Thoughts:

    1. The fact that you are posting on a real estate investment forum as a renter says (assuming you're not here for disruption) that you're already of that mindset, and that the equity wouldn't change that anyway - to wit "I always get my deposits back because I keep the place in good shape". That's not how many renters think.

    2. Renting is not "throwing your money away". There are legitimate reasons for renting rather than purchasing. Yes, renting does not allow you to build equity, but it also frees you from the costs of ownership. For example, when I go to the lake, I always rent a boat. In theory, I could have bought a boat by now for all the money I "threw away", but in reality I didn't have to store the boat, maintain it, replace equipment and motors, or drag it in and out of the water when I wanted to change lakes. Renting gives you a lot more freedom than owning, and while you are correct in that you won't build long term equity, I know people who rent cheap houses and put the money they would have spent on ownership into stocks, and they have done really well.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Michael Plante:
    Originally posted by @Jay Y.:

    Hi all,

    Just thinking out loud here but would anyone of you consider sharing some equity with your tenants?  I'm coming from the angle that I'm a lazy landlord who doesn't want to deal with maintenance calls and I hate turn over.  I'm thinking one way to make the tenant take pride in the home and stay in the house for 10 years is to share some equity with them...  I was thinking of giving the tenant 10% of the equity assuming prices don't collapse like 2008.  This would be accomplished by having 10% of the rent placed into a holding account and after X amount of good tenantship, the tenant could get the equity based upon how much money was put in and the current market price of the house.

    I know I'm skipping a lot of details but this would be the high level approach of what this model would be like.  I hope this makes sense and if it does, would you consider doing this if you're also a lazy landlord???

    Thanks!

     Pride of ownership May not be a reality 

    I sold a mobile home on land for $245,000 to a buyer who used a conventional loan with $90,000 down 

    The new owners live there now 

    I drove past the house 2 months later.   It Looks horrible 

    You could get someone like that and it Would only make your problems worse 

    Pay a PM that is why they exist

    from great to trash..  in one of my developments we went back for a water leak call within the 1 year builder warranty. the house looked like a bad tenant occupied home  You know stains in the carpets paint messed up few holes in sheet rock driveway already with big oil stains yard a mess .. and this a 450k new construction..  there's always that ONE.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @JD Martin:
    Originally posted by @Account Closed:

    Speaking as a renter, if this were something offered to me it would totally change my outlook on the whole deal. Renting is basically a one sided money pit. A renter pays up to 40% of their salary to pay someone else’s mortgage and pay someone else’s bank account and they never get any benefit from it. That money is just wasted. 

    If I were told that the equity would be shared, and that a part of the money I’m throwing away every month was going to something and that I could someday benefit from it instead of just making someone else richer and paying their bills, it would change my whole mindset. 

    I’d have a lot more respect for the landlord for one. And I’d go out of my way for him or her. I’d do everything I could to avoid moving and I’d treat the place even better than I already treat my home. Though honestly I usually get most of my deposits back because I don’t really damage anything. But I’d actively care for a place I was building equity in. And If there’s also the option to use that equity to purchase the place, oh yes would I appreciate that. 

    Doing this would make your renter resent you a lot less because now they would be benefiting from throwing their money away every month which is all renting basically is. 

     Thoughts:

    1. The fact that you are posting on a real estate investment forum as a renter says (assuming you're not here for disruption) that you're already of that mindset, and that the equity wouldn't change that anyway - to wit "I always get my deposits back because I keep the place in good shape". That's not how many renters think.

    2. Renting is not "throwing your money away". There are legitimate reasons for renting rather than purchasing. Yes, renting does not allow you to build equity, but it also frees you from the costs of ownership. For example, when I go to the lake, I always rent a boat. In theory, I could have bought a boat by now for all the money I "threw away", but in reality I didn't have to store the boat, maintain it, replace equipment and motors, or drag it in and out of the water when I wanted to change lakes. Renting gives you a lot more freedom than owning, and while you are correct in that you won't build long term equity, I know people who rent cheap houses and put the money they would have spent on ownership into stocks, and they have done really well.

    Equity share has been around for decades I was first introduced to it in the SF Bay Area in the mid to later 80s when prices hit 500k for a SFR and there was no small down payment loans at the time you needed 20% down to buy a home.. There were many investors who had the cash and would partner with the person who wanted to live there this person could qualify for the loan and did make all the payments and then in 5 years the deal was to sell and split equity or refi and pay investor off.. There is now a company with VC money doing this I think they actually advertise on BP.. mainly there pitch is equity share within a refi mortgage.. Of course the investors equity partner in these scenarios is much stronger USUALLY than the average renter financially speaking.

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    5y
    Originally posted by @Jay Y.:

    Hi all,

    Just thinking out loud here but would anyone of you consider sharing some equity with your tenants?  I'm coming from the angle that I'm a lazy landlord who doesn't want to deal with maintenance calls and I hate turn over.  I'm thinking one way to make the tenant take pride in the home and stay in the house for 10 years is to share some equity with them...  I was thinking of giving the tenant 10% of the equity assuming prices don't collapse like 2008.  This would be accomplished by having 10% of the rent placed into a holding account and after X amount of good tenantship, the tenant could get the equity based upon how much money was put in and the current market price of the house.

    I know I'm skipping a lot of details but this would be the high level approach of what this model would be like.  I hope this makes sense and if it does, would you consider doing this if you're also a lazy landlord???

    Thanks!

    Some legal student might consider writing a paper on this toward their degree. The breath of potential issues might be difficult to grasp.

    If you're THAT lazy as a landlord, maybe you should consider sacrificing equity build up in favor of professional management. That is, invest in the recovery of your leisure time rather than give such value away.

    We all want to motivate our tenants to treat our investments with some pride of "ownership" ("Leasehold Estate" *IS* a form of ownership, or at least, authorized possession). As others have cited, however, taking them on as equity partners may not be the best way to do that.

    My $0.02 ...

    1Reply
  • Dawn P.
    Rental Property Investor · Sumter, SC · Member since 2015 · 334 posts · 531 votes
    5y

    Absolutely not. I didn't bust my *** buying and fixing these houses to give away all the equity I worked for because I'm too lazy to keep them up.

    Hire a property manager if it's so much bother.

    1Reply
  • Grey Stone
    Investor · Palmdale · Member since 2016 · 112 posts · 80 votes
    5y

    Why not just do rent to own? You get a large down payment and can charge them a bit extra on top of the rent with an agreement they will be purchasing the property at a specified date and if they don't, you keep their down payment. This agreement usually says the tenant is responsible for certain repairs. In my rental agreement, I make sure to go over if there are any repair requests made, there is an automatic $50 fee to the tenant. This has stopped a lot of unnecessary complaints. You can also have incentives, of their rent won't increase if they pay in full and on time. I hate the original idea, not because it's unkind, but because this is a business. The equity in that property belongs to me and hubby and when we die, it will go to our kids. And realistically, it never makes sense to give anyone the most valuable aspect of your asset/business. 

    0Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    5y
    Originally posted by @Account Closed:

    Renting is basically a one sided money pit. A renter pays up to 40% of their salary to pay someone else’s mortgage and pay someone else’s bank account and they never get any benefit from it. That money is just wasted.  

    Mods: Is there a way we can get some sad violin music to accompany his post?


    Renters get no benefits from paying the rent? How about:

    • Renting allows you to live in an area that you couldn't normally afford. 
    • It allows you to not worry about things like replacing the roof or paying the property taxes.
    • It provides you freedom to move from one area to the next as changes in your life occur. 
    • In some areas, it allows you to live for less than what a mortgage payment would be.

    Sure, you don't build equity. That is reserved for the people who risked their capital. What did you, the renter, risk that deserves reward?

    3Reply
  • Jenna Barnes
    Specialist · Lexington, KY · Member since 2020 · 23 posts · 11 votes
    5y

    @Jay Y.

    What about suggesting a lease option? That way you could have the tenants still have equity in the deal and the option to buy when you’re ready to sell in 10 years? If they wanted to buy it then they’d be more incentivized to take better care of property since they could put extra money towards the down payment every month.

    0Reply
  • Etim Fisk
    Rental Property Investor · Springfield, IL · Member since 2019 · 21 posts · 6 votes
    5y

    @Jay Y. I would do no such thing if I were you. It is a legal and financial disaster, however, if you don’t want the responsibility of managing your investment properties you need to hire a property manager or sell it to someone who lives and breathes this life. Also, let’s say in the future you want to sell the property are you going to give the tenant 10% of the sale? There’s really no financial or legal upside to your idea for you as a landlord, but tremendous upside for the tenant. I would not do it. You will be stuck with this 10 percent partner for ever. Don’t do it!

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y

    No, I wouldn't recommend this. It would be cheaper to pay 10% of the rent income to a property manager. 

    I can think of many reasons why this is a bad idea, most of them already mentioned.

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  • Jay Y.
    OP
    Real Estate Agent · Atlanta, GA · Member since 2012 · 134 posts · 22 votes
    5y

    Wow, didn't expect to get some many responses. This one thread is my longest one yet during my 8 year tenure on BP. But thank you for your honesty and most for being somewhat respectful!

    2Reply
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