ES Sample Transaction
Buying with Equity Sharing
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 and your Investor borrow the remaining $400,000 and get a 4% fixed rate on a 30-year loan, so you make monthly payments of $2,430, $1,910 for the loan, $460 for property taxes and $60 for insurance. You and your partner split the equity 50/50.
|
Occupier Savings |
$15,000 |
|
Purchase Price |
$500,000 |
|
Occupier Down Payment |
$15,000 |
|
Investor Down Payment |
$85,000 |
|
Loan |
$400,000 |
|
Interest rate |
4% |
|
Monthly loan payment |
$1910 |
|
Monthly PITI |
$2430 |
What Happens at the End?
The Occuipier lives in the house and makes all the property's payments. After five years the Occupier will have paid $78,000 in interest and $27,500 in property taxes that is tax deductible, and the loan has been paid down to $361,000, for a $39,000 principal pay down.
|
Loan Interest Paid |
78,000 |
|
Property Tax Paid |
$27,500 |
|
Total Deductions |
$105,500 |
|
Tax Savings (30% tax bracket) |
$35,000 |
|
Loan pay down |
$39,000 |
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).
|
Annual Depreciation |
$13,636 |
|
Your Depreciation Share |
$6,818 |
|
Total Deductions |
$34,090 |
|
Investor Tax Savings |
$10,227 |
Time to Buy Out or Sell
At the end of five years, assuming this California property appreciated 5.25% per year, it is now worth $646,000. The loan balance is $361,000. Before calculating the equity to be split, the Occupier and Investor each get back the money paid for the down payment and the Occupier gets credit for the $39,000 loan principal pay down. This leaves $146,000 in equity, so each partner is entitled to $73,000.* Since this is a real estate capital gain, there typically is no tax liability to either party (as long as the Investor exchanges into another property at the end).
With the $15,000 down payment, $39,000 loan principal pay down and $73,000 of appreciation, the Occupier now has $127,000 in equity. If the Occupier sells instead of buying out the Investor, this amount will be reduced by commissions and sales expenses of about 6% which equals $39,000, leaving the Occupier with $88,000.*
*This does not include Occupier’s tax savings of $35,000.
|
Appreciation Per Year |
5.25% |
|
Ending Property Value |
$646,000 |
|
Occupier Down payment & Loan Pay down |
$54,000 |
|
Investor Down payment |
$85,000 |
|
Loan Repayment |
$361,000 |
|
Remaining Equity to Split |
$146,000 |
|
Occupier Share of Equity |
$73,000 |
|
Investor Share of Equity |
$73,000 |
|
Occupier Equity at End |
$127,000 |
|
Investor Cash at End |
$158,000 |
|
Occupier Net Income At Sale |
$88,000 |
|
Occupier Net Equity, No Sale |
$127,000 |
…Or Not Sell
As the Occupier, you can decide not to sell! Instead, you can refinance and 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 equity $127,000, and going forward you will not have to share the property’s appreciation. You will now refinance to buy out the Investor, but the cost to refinance will be far less than the cost to sell. The Equity Sharing Calculator on our Equity Sharing Products page performs these projections for you.
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 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 |
|
Net Income |
$83,227 |
|
Investor Return on Investment |
19.5% |
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 Equity Sharing Library you can review different scenarios that better represent your own potential transaction.