Question about Investing

[Robin A Jackson]

HI this is a sort of unorthodox question: 

I live with my partner (unmarried) and our child. We are building an ADU in our backyard. I am financing most of it with a HELOC and we are both putting in some cash. We are wondering how to structure our agreement so that it feel clear and protects us from any possible future changes in our relationship (which is also unorthodox and more of a friendship). Basically we want the deal to be clean and work in case we separate so we are looking at it as a business deal vs being married.

I own the house and pay most of the mortage and all utilities (she chips in a little)

She will put in a chunk into the ADU and from that get a percentage of the net income from that ADU based on her investment.

We are also wondering if she should get a small percentage of ownership/equity in the overall property vs just own a % of the ADU.

This  seems like it makes sense as the ADU is adding value to the overall property. However if she's buying into the overall property than it would make more sense for her money to get a net income from the TOTAL net of the property not just the ADU, right? That gets complex though with our current structure  and she would then be making way less cash per month (as it would be a smaller percentage of the total property value vs a larger percentage of just the ADU). 

We were thinking of doing this: Giving her 30% (her investment) in the ADU for cashflow (so 30% of net cashflow) plus giving her 3% equity in the house (worth 1Million). But she'd only get rent from the ADU portion even if we moved out but 3% if we sold. Does that make sense? 

I know this is maybe a bit weird and a lot of details - I'd love to hear anyone else's perspective if you've done anything like this, or what makes sense for you. 

Thanks! 

[Greg Malanga]

not unorthodox at all — this is just smart planning. You're basically structuring a real estate JV between two people who happen to live together.

You're already sensing the tension here. If she buys into the overall property, then yes, logically her return should come from the total property net income, not just the ADU. But like you said, that dilutes her monthly cash flow because her percentage of the whole property is tiny compared to her percentage of just the ADU. It also drags in your existing mortgage, your equity history, appreciation you earned before she was involved — it gets messy fast.

keep her interest scoped to the ADU only. It's cleaner, easier to calculate, and easier to unwind. Think of it like she's investing in a specific asset that happens to sit on your land.

Hope this helps you pointed in the right direction.