Home Buyer’s Equity Sharing Example and Analysis
Buying a home, even if it isn’t your first, can be a little overwhelming. There are a lot of numbers to consider, and it’s important to understand them. You need to know how much money is required up front and as you go along, and you need an idea of how much you’ll end up with when you sell.
In the following example, we explain the important numbers in a typical equity share transaction. For first-time buyers who are currently renting, we also compare equity sharing to renting for the same period of time.
| Starting Savings | $15,000 |
| Purchase Price | $500,000 |
| Your Down Payment | $15,000 |
| Partner Down Payment | $85,000 |
| Initial Loan Balance | $400,000 |
| Interest Rate | 6.5% |
| Your Monthly Payment | $2,167 |
Buying with Equity Sharing
For this example, suppose you have $15,000 in savings that you can spend on a down payment.
Using equity sharing, this is enough money to purchase a $500,000 house! You put in $15,000 for the down payment, and your partner puts in the remaining $85,000.
You borrow the remaining $400,000 and get a 6.5% rate on an interest only loan, so you make monthly payments of $2,167.
You and your partner split the equity 50/50.
| Loan Interest Paid | $130,000 |
| Property Tax Paid | $27,500 |
| Total Deductions | $157,500 |
| Tax Savings | $33,000 |
What Happens Next?
As the home buyer, you get to live in the house. You make all the property’s payments.
After five years you’ll have paid $157,500 in interest and property taxes that is usually tax deductible.
Depending on your other deductions, you could save about $33,000 on your income taxes if you’re in the 21% tax bracket.
| Appreciation Per Year | 5.25% |
| Ending Property Value | $646,000 |
| Your Repayment | $15,000 |
| Investor Repayment | $85,000 |
| Loan Repayment | $400,000 |
| Remaining Equity to Split | $146,000 |
| Your Share of Equity | $73,000 |
| Your Cash at End | $88,000 |
| Minus Sales Cost | $35,500 |
| Plus Your Tax Savings | $33,000 |
| Net Income | $85,500 |
Time to Sell
At the end of the five-year period, assuming the property appreciated 5.25% per year, it is now worth $646,000.
Before calculating the equity to be split, you and your partner each get back the money paid for the down payment, and the $400,000 mortgage is paid off.
This leaves $146,000 in equity, so you and your partner are each entitled to $73,000. Since this is a real estate gain and you lived in the property there is no tax liability.
Combined with your $15,000 repayment, you’ve now got $88,000. If you sell, you would also pay commissions and sales expenses of about 5.5% which equals $35,500, leaving you $52,500 in cash.
Since you also saved $33,000 in taxes, your net income for this property is $85,500.
…Or Not Sell
As the buyer, you can decide not to sell! Instead, you can elect to buy out your partner and remain in the house as the sole owner. This way you avoid the fees associated with selling the house, and pay only the costs of refinancing the mortgage. Either way, you pay no tax on your profit.
| Starting Savings | $15,000 |
| Monthly Rent Paid | $1575 |
| Monthly Bank Deposit | $592 |
| Interest Rate | 4% |
| Ending Savings | $57,695 |
| Minus Tax on Interest | $1,507 |
| Your Cash at End | $56,188 |
Comparison with Renting
So, how does equity sharing compare with renting?
Suppose you left your $15,000 in the bank instead of buying. Suppose you also paid $1,575 rent each month instead of $2,167 on a mortgage payment, and you put the remaining $592 in the bank. At 4% yearly interest your savings would total $57,695. You’d owe $1,507 in tax (at the 21% rate) on your earned interest, leaving you with $56,188.
To summarize, after renting for five years you’d have about $56,188. Equity sharing is a better option because it yields proceeds of $85,500, you’ve had the peace and security of your own home for five years, you improved your credit rating and you now have the option to stay in your home or step up to a better one.
Your Transaction May Differ Significantly
The examples given include various assumptions which may differ considerably from the actual figures in your transaction depending on the timing and the market. Small changes in the expected property appreciation rate, or interest rates, can significantly impact the results. Your eligibility for tax deductions may also vary. It is important to consider all factors and possible outcomes before deciding on the terms for your transaction.
