How To Structure Rental Property with live-in Tenant

Question

My brother and I plan to purchase a two bedroom condo in Utah. He plans to live in one of the rooms and rent out the other room. At times, he travels for months at a time so we may also Airbnb the condo out. Our plan is to put 10% down each and maintain a 50-50 split of ownership. How should his monthly mortgage payment be structured (should he pay more since he is living there?), and how should the proceeds from the rented room be split? I feel it needs to be structured in a way where he has incentive to rent the other room, or else his monthly payment goes up. Appreciate any help on this!

Theresa Harris · Answer

The easiest is to split everything 50:50. He pays rent for the one bedroom as if he was a tenant. After all the expenses, half the profit goes to him and half to you. All the rent gets split between you and him. You could have him manage the property for which he'd have to collect rent from the other tenant and in return, he'd be paid a fee (see what is normal in your area, often is it 9%).

Marcia Maynard · Answer

What is the most compelling reason for why you and your brother are considering this?First, be clear about your investment goal. Does it make sense to buy the property in the first place? Is the price right? What kind of cash flow do you hope to achieve? Is this property likely to gain in value over time? How will you benefit? How will your brother benefit?Second, separate the investment part from your brother as a tenant. Going in 50/50, you would split the down payment and the mortgage debt service. You would also split equally the maintenance and repair costs, as well as taxes and insurance. Put your agreement in writing and make it a binding contract, such as a partnership agreement.Will the property title and mortgage be in both your names? If only in one name, then there would be more risk for that person and they should be compensated for the extra risk. Determine how much money the unit would generate at market value. Or less if you want to give your brother a break. But basically, the entire unit would have a rent value. Then your brother would rent the entire unit from the partnership at that value. You would draw up a rental agreement, so the terms are clear. Keep partnership accounting separate from personal accounting.The rent your brother pays would be paid to the partnership and you both could take draws from the partnership as you determine is prudent.Your brother can sublet the extra room or even both rooms, if you agree. It could be boon or bust for him. All profit or loss from the subletting would be your brother's. There's his incentive.Your brother, as the tenant, will be responsible to establish and maintain utilities in his name. You could share maintenance duties, or since he is living there he could take care of all maintenance needs. If he takes care of all maintenance needs, then he should be compensated fairly for doing so. Either way, as a partner, you need to be kept in the loop. Good luck!

Camile Case · Answer

Are you purchasing this as an investment property or conventional mortgage?

Devon Dobson · Answer

Thank you all for responding so quickly!Very good points by all. My brother has never owned a home or condo so this would be a conventional loan. Mortgage would be in both our names (I assume that's best)Per Marcus's question about the why for this investment. My brother currently lives in UT and is paying someone else rent. I visit Utah frequently in the winter (to ski) and can see myself doing that for years and years to come. The thought is that it makes sense to go in on a 2 BR condo, where his quality of living is increased, and we sublet the second bedroom which covers the cost of our monthly payment and perhaps helps him out as well. We believe that this area of Utah - Park City, will appreciate in time. For an example, if the 2br condo is $500k - we each put $50k down (50/50 split). Say the mortgage + expenses comes to $3k. Would the best (and fair) way to structure it be that I am responsible for $1000 and my brother is responsible for $2000, since he is living there? Say the bedroom gets rented for $1500. Would it be fair for me to receive $1000 and him to receive $500? Now I am paying nothing, while building equity (yes, I give up my ability to visit and enjoy the place), and he is paying $1500 (instead of $2000) to live in a nice condo while building equity (yes, he does now have a roommate but I'm assuming he is happy living with this roommate).Thoughts on this example? How would you structure differently?Thanks so much for all of your

Marcus Auerbach · Answer

Yes, that does not feel right. Usually you want to incentivice behavior and pay for risk. But the bigger issue is I don't see how this will even make money. So if it is making losses and he is living there, what do you get out of the deal? What am I missing here??