Investor’s Equity Sharing Example and Analysis
Even with experience, buying real estate as an investment is complicated. It is important to analyze the numbers carefully and explore all of the possible outcomes before making any investment decision.
In the following example, we explain some of the important aspects of financial analysis for an equity share transaction. This example is meant to be illustrative only, and does not represent an average transaction or likely outcomes. Your transaction will vary based on any number of factors, and utilizing our online Equity Share Calculator™ you can review different scenarios that better represent your own potential transaction.
| Purchase Prince | $500,000 |
| Your Down Payment | $85,000 |
| Partner Down Payment | $15,000 |
| Total Down Payment | $100,000 |
| Your Ownership | 50% |
| Partner Ownership | 50% |
Investing in an Equity Share
For this example, suppose you have $85,000 in savings that you can invest.
You contribute $85,000 of the down payment, and your partner contributes $15,000. Together you have $100,000, so you can put 20% down and purchase a house worth $500,000.
Your partner borrows the remaining $400,000 and you buy the property, with both names on the title.
You and your partner split the equity 50/50.
| Annual Depreciation | $13,636 |
| Your Depreciation Share | $6,818 |
| Total Deductions | $34,090 |
| Tax Savings | $10,227 |
What Happens Next?
Over the next five years, your partner lives in the house and maintains it. Your partner makes all of the property payments while the property appreciates in value.
Each year, you are entitled to claim depreciation on your 50% of the value of the house itself. In this example, we’ll assume this comes to $6,818 per year that is probably deductible from income tax depending on your tax status.
Over five years, depending on your other deductions, you could save $10,227 on your income taxes (assumes 30% tax bracket).
| Appreciation Per Year | 5.25% |
| Ending Property Value | $646,000 |
| Down Payment (Repaid) | $85,000 |
| Home Buyer Repayment | $15,000 |
| Loan Repayment | $400,000 |
| Remaining Equity to Split | $146,000 |
| Your Share of Equity | $73,000 |
| Your Cash at End | $158,000 |
| Plus Your Tax Savings | $10,227 |
| Net Income | $168,227 |
| Return on Investment | 19.5% |
Time to Sell
At the end of the five-year period, presuming 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 you paid for the down payment.
The mortgage is also paid off. In this case we’ll assume your partner took an interest only loan, and the balance remains $400,000.
This leaves $146,000 in equity, so you and your partner are each entitled to $73,000. Combined with your $85,000 repayment, you’ve now got $158,000.
Your partner can choose to sell outright or buy your remaining interest and remain in the house as the sole owner. You are unaffected by this decision financially because if he decides to sell, your partner is responsible for the closing costs.
In summary, you invested $85,000, and your gross proceeds from this property are $168,227, for a net return of $83,227 after five years. Your simple annual rate of return before tax was 19.5%. If you exchanged out of your property into another investment property you could avoid paying any tax at all on your gain. If you decided to keep the proceeds, they would only be subject to a 15% capital gains tax, not ordinary income tax.
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 ownership split, 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.
