House Hacking Compensation Strategy

[Alexis Delulio]

Hi everyone - my husband and I are Denver based and are purchasing an investment property in the Tampa area with our friend. Our friend will be living in the house as his primary residence and we are splitting all costs/mortgage/profits 50/50 with him. 

The friend will be moving into the property, while rent from the other rooms/unit is expected to cover the mortgage, expenses and reserves so we essentially breakeven while he's living there. As a result, he has $0 in housing expenses and will be living rent free. However, my husband and I are out of state and the property needs some renovations and he'll be mostly managing those and acting as the property manager since he lives there and we don't. Has anyone had a similar setup and/or ideas on how to ensure he's fairly compensated for the extra work? Or would people consider the difference between what he's paying ($0) and market rent fair compensation in this scenario? He had a friend in real estate say that we should be paying a 10% property management fee on top of the rent benefit. I just want to make sure we're being fair so looking for objective third party opinions and am curious if anyone else has operated in a similar situation. Thanks!!

[Ben Rhodin]

Hey @Alexis Delulio! Seems like you got jumped on pretty quickly here. Let me try and provide some constructive feedback and how to structure this, as I know people that have done a similar setup with partners.

Here is my breakdown of what each person is bringing to the deal, and then it is honestly between you and them to decide what is fair. But I will also say, make sure you have everything ironed out as far as an operating agreement, especially when doing this with friends or family, as things can get sticky fast.

In this scenario, your friend is bringing the management (sure he's new, but as long as you have systems and a solid operating agreement it should be fine, and he's living there so...), the ability to get a low down payment loan (I'm assuming this is the route you are taking), and possibly half the downpayment. In return he is living for free, gaining experience, and receives half the equity gain in the property. Along with when he moves out he gets half the income. 

You, on the other hand, are only getting the equity stake until the property turns a profit, and that is not a very good return on your investment. And if you put down all the capital to acquire and rehab the property, you are putting a lot more risk in the property, and aren't getting a return.

The way I would look at it is, are you doing your friend a favor, or is this actually a solid investment for you? I would say the benefit of a low downpayment loan is a big one, but you aren't creating an ROI until rents increase or your friend moves out, and even then you are getting probably a pretty small ROI. So I would structure it in a way that makes it a worthwhile investment for you, as well as your friend. So I would say keep it all separate. Your friend is a tenant of the property and the manager, and treat him as such. Have him contribute his portion of the rent to the property, and give him a management fee (maybe 5-8%) ( so maybe he is living for 50% of what his housing payment would be). But in return, you take a larger stake in the ownership of the property, or the income generated, to compensate you for your capital injection. Probably so that you are at least creating an 8% return.

The biggest question, and how you can look at it objectively, is what is my tradeoff for doing this deal, and where could I have put my money? Cause if you could have invested in a true investment property and gotten a higher return then why would you help your friend? But if you don't have the capital for a full 20% down, or can't qualify for the loan, then your friend is also benefiting you and maybe 50/50 is fair. But if you could take the same money and create a better return elsewhere then I would rethink it, unless you aren't doing it for a true investment purpose but more to help out your friend (which is fine). Even when doing business with friends and family, you still want to make sure its run like a business.

Hopefully, that helps!