How to Structure Partnership on a House Hack

Question

My brother and I recently bought a house in South Nashville and have been trying to determine the best way to handle the share of rent collection. He lives in Nashville and has for about a year, and I live out of state. The house we bought is a single family with an in-law suite in the basement with a full kitchen/bath/living area. We just had long term renters move in to the upstairs and their rent payments cover all but $450 of the mortgage. Our initial idea was that he would essentially pay me half of the market rate for the space he is occupying in the basement, which would allow me to cash flow about $200 per month and he would be left with a payment of about $650 per month out of pocket. We are second guessing if that makes sense, as it seems as though he is paying me rent, which he doesn't like the sound of, and I completely understand. But at the same time, I have my own mortgage to pay for and it seems a bit unfair that we would essentially split his living expenses if he did not pay me for occupying space in the house. We are very cordial about the situation and just want to have the rent collection make sense in the end of the day without anyone getting screwed over. We are looking for unbiased opinions that will help us come to a logical conclusion.

Luka Milicevic · Answer

Sounds like this is way more complicated than it should be.What did you agree on from the start? In a partnership everyone should have a roll that is outlined and pre determined. If you didn't have that going into the deal, you should get that asap.Assuming he is managing the rental, then he should take 10% off the top from the collected rent and should pay 10% less than market rent to live there. 100% of utilities should be covered by him since he is living there. Everything else should be split down the middle.

Reid Chauvin · Answer

@Jake Craig - I don't really agree with the notion in above post that you have to cash-flow in order to be 'house hacking'. You are currently alleviating living expense (at least for your brother) that he'd otherwise be paying. This is a challenging situation to make equitable for both parties. Assuming you and your brother are splitting equity 50/50, he should be covering the $450 remainder on the mortgage at the very least. For me, whether or not he pays more to you would depend upon how much he is doing to manage the property and the tenants (time, effort and $), vs how much you are doing. If that's a fairly even split as well then he should probably be paying you rent.

Luke Stewart · Answer

side note. Since I am thinking about this, since one of you has to live there for the FHA requirement and you are really against him paying you cash, just have him cover all expenses and the remaining mortgage. So he pays the $450 and utilities, neither of you are cash flowing initially but you're getting equity with each mortgage payment. Then after a year he can move out and you rent it or he then can pay market value. That way you swallow no cash flow for 1 year and then start getting it once hes out. To be brutally honest, this exact situation is why I wouldn't partner with friends or family on a house hack without a contract prior. But we live and learn! best of luck.

Luke Stewart · Answer

I am going to agree with Reid on this one. Some markets its impossible to cash flow a duplex, like mine in Denver. If you are reducing your monthly payments until the time you can rent the full thing out that's a successful house hack to me. I currently am preapproved for a house hack and will have to pay about $2000 a month on it for the first year until I can move out into another. End of the day, the appreciation and yearly rent increases are gonna lead to cash flow down the road.I also agree with Reid that your brother should cover the rent. If it were me and I was in your shoes, I would determine what the fair market price is for the unit he is living in. Lets say its $1000. He owes $1000 (half to himself and half to you). So you would get $500 and he would keep $50 ($500-$450 mortgage remaining). At the end of the day it's a business partnership you are in and if he is living in the house you are both still entitled to your %50 of the net income. This seems like what you were doing initially and while yes hes paying you money, hes also paying himself. You are both receiving the same amount of cash and equity, the money should be the same. That's my take.

Jake Craig · Answer

@Reid Chauvin thank you for your response. In your opinion, do you think it changes anything given the fact that the loan we needed to use to qualify for the house was a FHA, which requires one of us to live there? Or do you think it would still make sense for him to pay some rent to me considering he would be paying to live somewhere if we had not bought a house.

Jeff Lara · Answer

just my opinion but thats not a house hack situation being described. If it were, you and your brother just need to split the 450 remaining mortgage and find a way to increase the rent on the tenants to cover the entire mortgage or more. Until then, you're both just paying a for a house that other people live in too that you all pay the mortgage on. House hacking, needs to be putting you(and your brother) breaking even or profiting on the deal. Hope this helps.