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1. The Traditional model. (Occupier lives in property and Investor
pays the majority of the down payment; Seller as Investor; Family
member(s) as Investor)
2. Co-Occupier model. (There is no Investor and all owners live
in the property or co-own a vacation home)
3. Joint Venture model. (All owners are investors; the property
is their investment)
1. The traditional model.
In the traditional equity share, the Investor wears varying hats.
Sometimes he is a family member(s); he can be the seller leaving
equity in the property and cashing out for the rest; the Investor
is often a stranger who understands the benefits of real estate
investing with a built in good tenant who pays all expenses). Our
35 page Agreement carefully guides the co-owners through these steps
and gives them a secure and proven way to co-own this property together
for their mutual profit.
After the Preliminary Commitment is signed, the Occupier should
obtain a pre-approval letter from the lender. Washington Mutual
is the best bank to provide the loan for your transaction because
they have a loan option that permits only the Occupier to sign on
the loan. This feature appeals to Investors for many reasons, one
of which is that their credit cannot be jeopardized by this purchase.
Some Occupiers will need the Investor's credit to qualify for the
loan or for the best loan rate. Investors who will be obligated
on the loan should receive a higher ownership percentage than those
not so obligated. [Note: If your transaction is the seller as Investor,
the seller contributes the down payment the third party Investor
would have, but it takes the form of equity in the property; the
seller cashes out with the rest in the form of loan proceeds.]
After loan pre-approval, the parties are ready to find a property.
The investor should evaluate the property almost as if he is buying
it on his own since his return will be tied to the property's appreciation.
He wants to see this property in an area of higher valued properties
and/or in an area with higher appreciation potential. The Investor
can couple with an Occupier in a different locale from where the
investor resides (perhaps a better appreciating area); the Investor
just needs to gain an understanding of the area to accurately assess
the profit potential of the property the Occupier selects.
Typically, the Investor puts up the lion's share of a 20% down
payment. It is important, though, for the Occupier to contribute
between 3 and 5% of the purchase price to give the Occupier the
motivation to ride out a difficult market. When deciding the percentages
of ownership, the Equity Share Calculator should be used. The co-owners
should try to project how much the property will appreciate, on
a yearly basis, during their ownership. The best way to do this
is to ascertain how much the property has appreciated over the past
seven years and use a lower number. This is where your real estate
agent comes in handy. Your agent will give you this essential number.
The Investor should decide how much of a return he wants to see
on the funds he will contribute to the property. The ownership percentages
can be anything the co-owners desire. An Investor obligated on the
loan partnering with an Occupier with a less than good credit score
may require a projected return of 20% or more annually while another
Investor may only project 15%. The Equity Share Calculator available
on our "Products" page will assign ownership percentages
based on this criterion and will project how much the co-owners
will earn in profit and tax deductions based on these assumptions.
While the lion's share of down payment is contributed by the Investor,
the majority of tax deductions go to the Occupier. This is one of
the Occupier's greatest advantages. He turns his rental payment
into valuable tax deductions. The Investor has his potpourri of
tax benefits too when he claims depreciation for his percentage
interest in the property and exchanges out tax free at the end of
the transaction. And for both, profit is the name of the game.
Typically, the Occupier pays the closing costs and receives tax
benefits, not reimbursement, in return. Down payment and capital
improvement contributions are treated as reimbursable payments returned
to the paying party(s) before equity is split. The Occupier maintains
the property and makes all improvements while the Investor sits
back awaiting his return in appreciation, knowing his investment
is being taken care of because their Agreement requires it.
The Occupier makes all payments on the property and provides Investor
with proof of payment as payments are made. In this manner, the
Investor can best guard against Occupier payment default. If the
Occupier does not provide proof of payment, the Investor immediately
issues his default notice and rapidly moves ahead with buy out or
sale of the property. If the agreement provisions are closely followed,
there are no surprises to the Investor. He is in the loop every
step of the way.
The parties protect their investment by setting a required appreciation
rate in their agreement. When the agreement ends, if the property
has not appreciated the desired amount, the co-ownership continues
on until it does. This way, the co-owners are protected from selling
in a down market and are assured that they will achieve the minimum
result they intended - or close to it.
If the required appreciation is met, the Occupier is given the
first option to buy out the Investor at term. It should be this
way since the Occupier has made this property his castle and may
want to remain in the home after the agreement ends. If the Occupier
does not buy out the Investor, the Investor can buy out the Occupier.
If the co-owners do not buy one another out, the property is sold
at term. The Occupier pays the closing costs because the expectation
is that Occupier will buy out the Investor, and when he doesn't,
he should pick up the sale costs. In this manner, the Investor's
projected return stays the same regardless of the options selected
at term.
The IRS Requirement of Rental of Investor's Portion of the Property.
In the traditional equity share, where the occupier occupies the
entire property but only owns part, the Occupier must pay fair rent
to the Investor for use of the Investor's portion of the property.
This is accomplished by the Occupier paying no more than he would
have paid, yet some payments are shifted to the Investor who pays
the expense. The Equity Sharing calculator tells you how much this
rental amount is. What occurs is that the Occupier makes the rental
payment out to the Investor (to a bank account in the name of the
Investor, but often with the Occupier as the signatory). Each month
Occupier makes out a check in the rental amount to the Investor
account, and that amount is then drawn from the Investor account
and paid to expenses the Occupier has agreed to pay. The rest of
the expenses above the rental amount go directly from the Occupier
to the creditor. The Equity Sharing Agreement ideally assigns rental
reimbursement first to expenses the Investor can claim but the principal
residence Occupier cannot. The end tax result is that the Investor
reports income in the amount of the rent with an equal amount of
tax deductions for expenses paid. The Occupier loses between 10
and 15% of deductions for deductible property expenses.
2. Co-Occupier/Vacation Home model.
This model should be used when there is no third party Investor
and more than one owner occupies the property. Co-occupier co-ownership
is the ideal solution for cohabitating couples and friends who want
to buy but cannot afford a home alone. This agreement should also
be used for a vacation home co-ownership; you will need to build
in the co-owner usage times and Rules & Regulations, but this
form is the most appropriate model to use. Our 25 page Agreement
carefully guides the co-owners through the obligations each will
assume and gives them a secure and proven way to co-own a property
together for their mutual profit and enjoyment.
3. Joint Venture model.
Joint venturers typically buy a property and rent it out or buy
a property, improve it and hold or sell. These days Investors want
to invest in real estate similar to how they did in the stock market,
holding a small fractional interest; yet, they want more control
and profit than is available with a real estate investment trust.
Joint venture co-ownership fills that need. Investors can also directly
invest their retirement funds through a self-directed account custodian.
Our 22 page Joint Venture Agreement carefully guides these co-owners
through these steps and gives them a secure and proven way to co-own
this property together for their mutual profit and enjoyment.
Our Equity Share Coach available on our "products" page
guides you through the steps you will take in your transaction.
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