Buying With a Partner When All is NOT Equal


When you buy a home with a partner or spouse and everything is split 50/50, it is easy. But what happens when what you bring to the table is different? How do you make it equitable for both parties when contributions are not equal? This morning I spoke to a couple that are looking to combine their two households. One has a significant downpayment, while the other has the income to qualify. This is an almost identical scenario to how Penny & I bought an apartment with a partner several years ago. Let's talk about this mornings example. Partner 1 makes good money and qualify for a significant loan, but has not down payment. Partner 2 has $200,000 cash to put down, but no real document-able income. This scenario was actually pretty easy because during our conversation, it was clear that they would want to do most things 50/50, but even if this was not the case, I will will show you how this can be done. The most important thing to consider is that Cash and Debt are the same in terms of contribution. Let me explain. When you purchase a property for 1 million dollars, you can pay all cash, get a 1 million dollar loan, or any combination of the two that add up to the purchase price. The seller would not care, he gets his million dollars. As that relates to our couple, one party could pay $500,000 in cash and the other could contribute a $500,000 loan. Of course, then the party that contributed the $500,000 loan would then be responsible for paying off that loan, making both the monthly payments and in the event of a sale, would be responsible for paying off that loan out of their proceeds. But what if one partners cash was not exactly equal to the other persons down payment? Then each party takes responsibility for a portion of the loan that makes the combination of their debt obligation plus their down payment equal to each others. As in the above example one party has $200,000 and the other party will not contribute any cash but will qualify for the loan. In this instance the qualifying for the loan is not necessary relevant, other than that borrower that has no equity into the home shows the financial power to make the payment, this is a good thing. In this instance the $800,000 loan would be split $300,000 / $500,000 with the party with no down payment making 5/8ths of the payment and the party with $200,000 down making only 3/8ths of the payment. Then each person has contributed 1/2 to the purchase of the property, either through the use of cash and/or making the payments on the borrowed money. How then should other items be split, assuming 50/50 ownership?
  1. The party with no down payment would take 5/8ths of the interest right off, the party with the $200,000 down would take 3/8ths of the interest right off.
  2. The party with no down payment would pay 5/8ths of the costs associated with obtaining the loan, the party with the $200,000 down would pay 3/8ths of the loan origination costs.
  3. Each would pay 1/2 of the property taxes
  4. Each would pay 1/2 of all expenses  etc.
  5. If the property were an income producing property then each party would earn 1/2 of the income produced.
How would the proceeds be split when the property is sold? Each party gets 1/2 of the proceeds subject to their portion of the loans outstanding balance. Let's assume in our example that the property is sold at a later date for 1.4 mil, and during that time the loan was reduced from $800,000 to $640,000 through principle reduction. This would be the outcome: Party 1 (No down payment) +$700,000 (Gross Proceeds - 1.4 mil / 2) -$400,000 ($640,000 x 5/8ths) +$300,000 Net Proceeds Party 2 ($200,000 down payment) + 700,000 (Gross Proceeds) -$240,000 ($640,000 x 3/8th) +460,000 Net Proceeds  This model can then be infinitely adjusted to accomodate each parties cash position and desire for debt. As an example if one party put down $150,000 and the other put down $50,000, then the percentage of the loan that each party would pay would be adjusted as follows: $50,000 + $450,000 ($450,000 / $800,000 = 56.25% of the loan) $150,000 +$350,000 ($350,000 / $800,000 = 43.75% of the loan) What if the partners want different ownership interests?  Simply use the principle that to acquire a property, Debt Obligation and Cash Down Payment are the same. So if Partner 1 can only afford 40% of the property and has $50,000 down and Partner 2 can afford more, 60%, and puts $150,000 down then the model looks as follows. Partner 1 $50,000 (Down Payment) $350,000 (Loan Portion) $400,000 (Ownership interest - %40) Partner 2 $150,000 (Down Payment) $450,000 (Loan Portion) $600,000 (Ownership interest - %60) If this is the case then all the expenses and income that were previously split 50/50 should now be adjusted based upon the percentage of ownership interest. Example, the buyer with %60 ownership interest would earn 60% of the income and pay for %60 of the expenses. However, this ownership interest is a separate issue from the percentage of loan obligation for each party. In our example above Partner 2 owns %60 of the property, but is only responsible for 56.25% ($450,000 / $800,000) of the debt. Partnerships are great opportunities for two or more people to pool their resources. In the above instance, neither party could buy without the other. One party brought cash, the other brought income qualifying power. A true Win / Win situation. However, there are many other considerations that I have not covered. Please feel free to contact John and Penny at 562 572-2296 or me should you have additional questions or be interested in purchasing a property with a partner and make sure everybody is treated fairly.