What is a good formula for splitting profits on a property?

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I am involved in a 3-way investment on a rental property and we are being forced to sell because of a DOT project. Our profit on this property will be approximately $75,000 and we need to figure out how to split this up. Being close family members, we weren't too concerned about figuring this out we bought the property.

I would really appreciate any suggestions from real estate investors experienced with partnership investments like this.

Here are the figures for the capital and work/mangement invested by each party.

Investor #1:
Invested $150, 000 by taking out a regular home loan.
Lived at the property and payed "rent".
Did 85% of the maintenance, improvements and rental property management.

Investor #2:
Invested $75,000 from a home equity line of credit.
Did 0% of the maintenance, improvements and rental property management.

Investor #3:
Invested $25,000 from a home equity line of credit.
Did 15% of the maintenance, improvements and rental property management.

Thank you!

[Jon Holdman]

A good formula is to sort out the division of profits before you start the investment. Another good one is to avoid investing with close family members lest they turn into distant family members. But, too late for that, I guess.

So, if was a simple investment with three partners with a 150/75/25 split, you would split the profit accordingly. Doesn't matter where the money came from, it would be 60%/30%/10% split. I would think a significant portion of the profit should be split that way even considering the other contributions.

That leaves the question of how to value the other contributions. I'd value the property management at zero since one of you is living there. Its not as if you had to advertise for a tenant, interview and screen them or (hopefully) do any evictions. That leaves the maintenance and improvements. I'd consider the actual value spent as a contribution to the investment, if was paid out of pocket by one of the three investors. That would include any materials or payments to a contractor. Any such expenditures would count toward that investors contribution to do the split calculation above. If instead, any such payments were made from a common fund that was left after the 250K was put in and the property was bought, then those payments would be ignored. They're already covered by the intial contributions.

Then there's the labor thats implied by the 85/15 split. Frankly I'd be inclined to give that zero credit. It would not get any credit in an IRS basis calculation. Courts don't usually allow a landlord to pay himself anything when making deductions from a security deposit. You don't make any claims that any of the three of you are actually licensed contractors that were doing paid work for the investment group.

If you're determined to count the labor, and you have some reasonable accounting of the actual hours spent, then agree on some hourly rate. I would think this would be significantly less than the hourly rate you would pay a contractor or handyman, unless the one doing the work was a professional.

That leaves the "rent". If investor #1 made a market rent payment, and that was distributed equally to all three investors, then its a wash. That is, if #2 received 30% of market rent and #3 received 10%, then you're all even. That assumes all expenses were borne in shares based on the contribution, as would be the case if all expenses came from a common pool that was funded by all three. If instead, there was no payment to #2 and #3, then I would deduct the total fair market rent from #1's contribution. Essentially, #1 was getting his contribution back on a monthy basis in lieu of rent payments.

Now, it looks to me like what really happened was that #1 bought, financed, and lived in a house. #2 and #3 loaned him some money to help him buy it. #3 came by once in a while and helped paint. Now that you have to sell, #1's claiming a share of the profit greater than 60%, arguing he did all the work on the place. I would think #1 would get a smaller share since he had the benefit of having a place to rent.

Somebody's going to have hurt feelings over this.

Jon