Sample Transaction [Traditional Equity Share]
This page was updated April 2016.
In the following example, we explain the important numbers in a typical Shared Ownership transaction. For first-time buyers who are currently renting, we also compare shared ownership to renting for the same period of time.
Buying with Shared Ownership
For this example, suppose you have $15,000 in savings that you can spend on a down payment. Using equity sharing, this is enough money to purchase a $500,000 house! You put in $15,000 for the down payment, and your Investor partner puts in the remaining $85,000. You borrow the remaining $400,000 and get a 6.5% rate on an interest only loan, so you make monthly payments of $2,167. You and your partner typically split the equity 50/50.
|Occupier Down Payment||$15,000|
|Investor Down Payment||$85,000|
What Happens Next?
The Occuipier lives in the house and makes all the property's payments. After five years the Occupier will have paid $157,500 in interest and property taxes that is usually tax deductible.
|Loan Interest Paid||$130,000|
|Property Tax Paid||$27,500|
Each year, the Investor is entitled to claim depreciation on 50% of the value of the house. In this example, we'll assume this comes to $6,818 per year that is probably deductible from income tax depending on your tax status. Over five years, depending on your other deductions, the Investor could save $10,227 on income taxes (assumes 30% tax bracket).
|Your Depreciation Share||$6,818|
|Investor Tax Savings||$10,227|
Time to Sell
At the end of five years, assuming the property appreciated 5.25% per year, it is now worth $646,000. Before calculating the equity to be split, the Occupier and Investor each get back the money paid for the down payment, and the $400,000 mortgage is paid off. This leaves $146,000 in equity, so each partner is entitled to $73,000. Since this is a real estate gain, there typically is no tax liability to either party (as long as the Investor exchanges into another property at the end).
Combined with the$15,000 repayment, the Occupier's now got $88,000. If the Occupier sells intead of buying out the Investor, this amount will be reduced by commissions and sales expenses of about 5.5% which equals $35,500, leaving the Occupier with $52,500 in cash. Since the Occupier also saved $33,000 in taxes, his net income for this property is $85,500 at sale.
|Appreciation Per Year||5.25%|
|Ending Property Value||$646,000|
|Remaining Equity to Split||$146,000|
|Occupier Share of Equity||$73,000|
|Investor Share of Equity||$73,000|
|Occupier Cash at End||$88,000|
|Investor Cash at End||$158,000|
|Occupier Net Income At Sale||$85,500|
|Occupier Net Income, No Sale||$121,000|
Or Not Sell
As the Occupier, you can decide not to sell! Instead, you can elect to buy out your partner and remain in the house as the sole owner. This way you avoid the fees associated with selling the house, increasing your net income to $121,000. You will now refinance to buy out the Investor, but the cost to refinance will be far less than the cost to sell.
The Investor's Summary
The Investor is unaffected by the Occupier's decision to sell or buy out because if the Occupier decides to sell, the Occupier is responsible for the closing costs.The Investor earned $73,000 in appreciation, for a net return of $83,227 if you include the depreciation deduction. The Investor's simple annual rate of return on investment is 19.5% counting depreciation and about 17% not counting depreciation. If the Investor exchanges out of the property into another investment property, he will avoid paying any tax on this gain. If the Investor instead decides to keep the proceeds, they would only be subject to a 15% capital gains tax, not ordinary income tax. And, if the Occupier decides to sell, the Investor can also buy him out and continue on with this investment but with a new Occupier or a renter.
|Investor Share of Equity||$73,000|
|Plus Depreciation Tax Savings||$10,227|
|Investor Return on Investment||19.5%|
Comparison with Renting
So, how does equity sharing compare with renting for the Occupier? Suppose you left your $15,000 in the bank instead of buying. Suppose you also paid $1,575 rent each month instead of $2,167 on a mortgage payment, and you put the remaining $592 in the bank. At a high pre-recession 4% yearly interest your savings would total $57,695. You'd owe $1,507 in tax (at the 21% rate) on your earned interest, leaving you with $56,188.
|Monthly Rent Paid||$1575|
|Monthly Bank Deposit||$592|
|Minus Tax on Interest||$1,507|
|Your Cash at End||$56,188|
To summarize, after renting for five years you'd have about $56,188. Equity sharing is a better option because it yields proceeds of $85,500, you've had the peace and security of your own home for five years, you improved your credit rating and you now have the option to stay in your home or step up to a better one.
Your Transaction May Differ Significantly
The examples given include various assumptions which may differ considerably from the actual figures in your transaction depending on the timing and the market. Your transaction will vary based on any number of factors, and utilizing our Equity Share Calculator available in our Products Line you can review different scenarios that better represent your own potential transaction.