In the Traditional Equity Share Co-Ownership (where the Occupier will live in the house and the Investor will not) the Occupier does not have the down payment but has the funds to pay the house's expenses. S/he's got good credit, good income and wants to own a home. The Investor can wear varying hats. Sometimes he is a family member. In a buyer's market, she may be the seller leaving equity in the property and cashing out for the rest. Other times, the Investor is a stranger who understands the benefits of real estate investing with a built in good tenant who pays all expenses.
The Equity Share Numbers
While the Investor typically puts up the lion's share of the down payment, it is important for the Occupier to be reasonably invested to provide the motivation to ride out a difficult market. While there are endless ways to structure the equity share, the typical format runs right and left of an 80% loan, 17% Investor funds and 3% Occupier funds with the equity split 50-50. The very best format is the one that accommodates the financial and tax needs of the parties. When deciding the appropriate ownership split for your transaction, the Equity Share Calculator comes in handy.
The Equity Share Co-Ownership Benefits
While most of the down payment is contributed by the Investor, the majority of tax deductions go to the Occupier. This is one of the Occupier's greatest advantages. He turns his rental payments into valuable tax deductions. The Investor has his potpourri of tax benefits too when he claims depreciation for his interest in the property and exchanges out tax free at the end of the transaction. And for both, profit is the name of the game.
Typically, the Occupier pays the closing costs and receives tax benefits, not reimbursement, in return. In the Equity Share down payment and capital improvement contributions are treated as reimbursable payments returned to the paying party(s) before equity is split. The Occupier maintains the property and makes all improvements while the Investor sits back awaiting his return in appreciation, knowing his investment is being taken care of because their Agreement requires it.
The Equity Share Models
There are three different equity sharing models which will be discussed in a later post. They are the traditional equity share, the co-occupier model and the joint venture. Each Agreement carefully guide the co-owners through the obligations each will assume and gives them a secure and proven way to co-own a property together for their mutual profit and enjoyment.