Fair rent to pay for partial owner occupied apartment

Question

I am 75% owner of a two-unit apartment. I have moved into one apartment as my full-time residence. I'm negotiating with the 25% owner what rent I should pay.

He'd like me to pay full market rent ($800/month). His point is that he should not see any less of a profit merely because I am the new occupant. Since I'd pay nothing if I were full owner, I'd like to meet him somewhere in between. What would be appropriate?

(Possibly relevant: Co-owner has been keeping all of the profits since we bought the property - he doesn't earn enough money in his day job to pay his bills. Whatever rent I pay, I'm confident I will never see my share of any profits, even though I have to pay income taxes on it. He does not want me to buy him out of his share.)

Edit: I presented these options to my brother, the co-owner. He likes the idea of me moving out. I don't at this time have money for a house, nor credit good enough to get a loan (my total credit card limit is $16K, but $11K is being used by him, since he's maxed out his own cards and sometimes needs money instantly to pay health insurance or taxes; related question here).

Answer 1

First, let's note the lessons to learn here, for other readers, and your future benefit.

• If you're going to live in it, either own all of it or none of it (rent).
• If you're going to own 75% of 2 units, own 100% of one and 50% of the other, instead of 75% of either.
• Don't enter a business partnership without clear contract defining the relationship and how disagreements will be handled.
• When you've put money in a business, keep an eye on how it's doing.
• Everything important should always be put writing and a copy given to every party.

Second, what is fair: As stated, you own 75% of the unit, so you should get 75% of the income, and the other guy is entitled to 25%. Therefore if you move in, and the rent is $800, you owe him $200. Note, this is fair purely in the sense of writing the contract. Once the agreement is done, it's irrelevant what's "fair". You are at each other's mercy. "Fair rent" is just a number pulled out of the air, there is no rule saying you must charge that rent. So what if you say the rent is $1 and he says it's $10,000? If it was a 3rd person renting, and one of you liked him but the other one didn't, how would you handle that? Would this person make two separate contracts with you and the other owner and pay two rents? It just seems like a very poorly defined relationship, and a lot depends on how you were actually planning to set rent for ordinary tenants, and how disputes are settled. We can't know this. It's between you and the other guy. Whatever agreement you made, you have to follow it, or convince him to make a new agreement. But as I said, the obvious fair division is that you pay 3/4 of the rent "to yourself" and 1/4 to him. Otherwise, why would you have put up the capital for 3/4 of the property, if not to be entitled to 3/4s of its rental income?

However, since you say in comments you were an absentee owner for years, the question arises of who paid for expenses like maintenance in this time. Just as it's "fair" that you get 75% of rent, it's fair that you pay 75% of expenses (of the property, not unrelated expenses like the other guy's health insurance, that's either just him cheating you or you gifting him money, depending on your perspective). But if when you were absent, he paid 100% of the expenses, and did 100% of the work, perhaps now he expects compensation for this and is not willing to give you the full 75%. Again, that's between you and him.

As for what to do: Explain to him that your absence is over and now you want to be an active owner again. Make a new contract. Ideally make it so that you become full owner of one unit and you split the other one. If not, at least put in how much rent who owes whom if either of you wants to live in the unit. And also who gets dibs if both of you decide to live in the same unit.

Sounds like he basically appropriated your share of the income over the years. That sucks, but you don't have much grounds to ask for it back now. Sounds like you didn't really resist much, so it's questionable whether he really took it without your permission. Regardless, if there isn't a record it will be hard to prove in court who actually collected how much money. Also, he could easily claim that he signed up for only 25% of the thing but ended up saddled with 100% of the work, so you owe him money, maybe even on top of what he collected over the years. Your biggest hope here is that he gets a guilty conscience and voluntarily returns you some of the money. Anyway, first focus on getting out of a bad situation and being in a fair arrangement going forward, which is something you can change. Then worry about the past, which you might not be able to change.

Note that making a deal here is in both of your interests. I'm assuming both of you must give permission for a tenant to move in. If either of you wants to stall, you can just refuse to approve any tenant. The apartment will stay vacant and neither of you gets money until an agreement is made.

If he refuses to come to an agreement, remember that you are not stuck with him.

• There's always the nuclear option of just selling your part of the house and letting someone else deal with the headache. The problem is that, as you've found out, owning 75% of a house is not 75% as good as owning the whole house, so you may have trouble finding buyers.
• You could borrow money against your share, like a title loan or a reverse mortgage, and take the money to move somewhere else. This might be easier than finding a buyer. You can then keep renewing the loan, or just let it expire and let the bank seize the apartment (and the problem). Not ideal, but again, as a last resort.
• You could offer to buy the other guy out. If he's not stupid, he will demand way too much money for the 25%, but you can think of the premium as the "make headache go away fee". It will then be up to you to decide if you hate the situation enough to pay him what he asks.
• You could move somewhere else yourself, rent out both units, and use the income to pay your own rent or mortgage. Just make sure you're actually getting your 75% this time.

In fact, the arrangement is so bad, that I would try one of these and get out of the deal regardless of whether he makes an agreement or not. There's just no good reason to have part ownership like this, even with a cooperative partner.

Please note: OP initially hadn't mentioned this, but he was actually okay with the other guy (actually his brother) taking the money because he wants to help out family. So really the question is about his relationship with his brother, and has little to do with fair rent. I answered anyway as if the question was asked for co-owning with a stranger.

Answer 2

If there are not other agreements:

1. If you own 75% and he owns 25% you should have good bookkeeping in place. All expenses and profits associate with the property should go into it. As you have no mortgage, there should be a good profit. You should get 75% of that profit!

2. As this seems to be a dishonest business-relationship and you seemingly do not share a common understanding off how to deal with each other: If I were in your shoes, I´d end this relationship ASAP. Either you buy him out, he buys you out or you sell to a third party and split the profit according to shares.

I´d strongly recommend to get a lawyer. Sounds to me that you have already been taken advantage of and that this will continue without competent counsel!

Edit: As now it got clear there are family-ties involved, maybe have a honest talk first, before lawyering up. Either way, you need to treat this as a serious business. If you want to subsidize the family with the returns, that´s OK - but you still need it to be run properly and taxed correctly. Maybe it could be an option to pay your brother for this work but from the impression you give here: Think long and hard if it is healthy for you to mix family and business in this way.

Answer 3

Your brother has been robbing you blind for years.

Sorry, that's the reality of the situation. I've read all your comments.

His point is that he should not see any less of a profit merely because I am the new occupant.

The only profits he has seen have been stolen from you, even to the extent that you reported them to the IRS as income despite having never had them in your possession, ever.

He should be seeing a LOT less profits, regardless of who is the new occupant.

I talked to my brother, and he agrees with your first paragraph - I should either pay full rent or move out. This isn't being done behind anyone's back, though. His wife knows he's not paying me. She knows I haven't been paid for the mortgage I have on their house for 20 years, either - not paying me was her decision.

Sounds like your sister-in-law is complicit in leeching off of your funds.

There is a saying, "Be greedy until you can afford to be generous."

There is another saying along the lines that when you mix friendship with finance you lose both. That's not true in all cases, but it IS true that when you let the lines between charity and business get all blurry you are setting yourself up for a LOT of trouble.

The only right way to support your brother is to separate the question of whether you support your brother (and how), ENTIRELY from the business accounts.

You have two different factors here:

1. Your finance and exchange lines. You want these to be STRAIGHT and clean. Professional accounting. Not one penny let drift. Actually businesslike. HIRE AN ACCOUNTANT and get professional advice.
2. Your charity to your brother. This should be your SOLE decision as to how much you want to financially support your brother and his family. If he owes you money, he owes you money. If you want to forgive the debt (e.g. the mortgage), that's up to you, but even then you get advice from your accountant as to HOW to go about doing so and what the tax implications are.

Letting someone muddle the accounts books is not being charitable. It's being willfully blind.

Make money. Do it legally. Do it with impeccable accounts books. Then give your brother as much money as you want (and do so in the manner your accountant advises best for tax reasons).

Don't "support" your brother by letting him embezzle from your "business" that you "co-own."

The financial irregularities here are going to keep you tangled for a LONG while. Talk to a good accountant, and possibly to a tax lawyer, and start the process of extricating yourself.

Answer 4

He is 100% right. All occupying owners should be paying market rent. Including him if he lives there!

You should get a market renter in there, and live somewhere else. Then

File suit, alleging that he's been cheating you out of your share

He is supposed to give you 75% of proceeds and you are responsible for 75% of expenses including a property manager's fees. He should deposit all gross rents into the shared account, pay himself a reasonable, market rate as he says fee for property management, pay expenses out of the shared account, and every other time he takes money, he must give you 75% of what's taken out and keep 25%.

But that is not what has been happening. He has been running a business and embezzling from it, and obfuscating this by not keeping adequate and proper records. He may be doing this passively, but passive neglect of books + greed = embezzlement.

The "lawsuit" won't actually go anywhere in the courts. Filing is merely to "wake him up" and allow you access to discovery, to compel his cooperation with an audit. That is your real weapon.

There is a legal standard for how good his records have to be, and how he must account for the services he takes.

He must pay his rent, at least on the books, and he's quite right, the rent needs to be booked at market rates. He does get to chargeback for his property management services, but this too is market rate only: overcharging is embezzlement.

Then actually do bring in a third-party property manager

And both of you pay rent to him. And he pays expenses and splits the proceeds 75/25.

Since you paid cash, there is no mortgage lender involved, and you really should have set up an LLC wrapper and learned how to do those things.

There is nothing wrong with subsidizing your brother

However, there is something seriously wrong with doing it "behind the curtain" of a business that is dysfunctional and effectively a sham, that is manipulated to look and feel (internally and externally) like an honest business arrangement.

Obviously, this is being done for the brother's vanity. He is effectively taking a $1500-ish check from you every month, without the humiliation of his wife and community seeing him do so, and without feeling the shame. Even though, in his heart of hearts, he knows it, and that is why it is so damaging

It damages you as well, since you are a party to it. It is an impediment to the success of both of you.

Remember, this isn't nothing. The capital you have tied up in the house could be serving you in other ways. Averaging 5-6% a year in the stock market, which is a sure thing over >20 yeat spans (go look up the S&P 500 in the year you bought that house, whatever the ratio is to today's S&P, that would have been your gains, it is that simple). Or invested in a different house producing real rental income, instead of stuck in this house. Tying up your capital is robbing you of its due income.

So you settle up the revenue stream and ownership, make it legal and financially a square deal.

Now, if your brother still needs subsidy to make ends meet, you write him a check.

Of course, it is a huge part of American lore that a man provides. Your brother may find direct subsidy humiliating. But more likely than not, this will make him step up and actually live to the level of his self-definition.

One more thing: taxes

When he takes more than his share, that is income to him. He must pay taxes on it. Make sure he gets a 1099 for that amount.

However, if you run your accounting books cleanly, and you use the "hand him a check because you love him" method of subsidizinghis lifestyle, that is a gift. You can donate up to $30,000 a year ($2500 a month) to him and his wife without him paying any taxes on it. And your wife can do it again.

You cannot call his embezzling "a family gift" because it isn't structured as a gift.

Answer 5

You've added a lot of information in various comments that isn't in the question, so I'll try to pull it all together in one answer.

If you're living in the unit, then you should definitely be paying a fair rent. As for a particular dollar amount, a good starting point is whatever the other unit is currently renting for. Depending on your jurisdiction, not paying a fair rent can result in you having to pay taxes on imputed income. Some of that money might turn around and end up right back in your pocket at the end of the month, but it helps keep track of what money is flowing where.

If your partner is not giving you your share of the business' proceeds, then that is theft in one form or another. Choosing to help him out financially is perfectly fine, but that's your decision to make. You're perfectly free to turn around and give him your share of the income but if he takes it upon himself to confiscate it, then that's theft. I understand the plight of someone who has more bills than income, but that doesn't give him the moral or legal right to take what isn't his. He needs to pay you your share of the profits, and then afterwards you can give him however much you want to give him. You certainly should not be paying income taxes on money that he kept for himself, you should likely be deducting it as a loss due to theft. If he's keeping the money and having you claim the income on your tax return, the IRS could even see that as fraud.

Overall, you're in a very tough situation. Co-owning a business is difficult, and doing it with a family member even more so. If your business agreements with your co-owner are informal and they aren't living up to their end of the deal, it can help to formalize those agreements and put a system in place to enforce them. Many small businesses create a corporate entity (like a LLC) to own the business' property and bank accounts. Rents would be paid to the company (not to you or your partner), and the company would pay expenses as well as pay dividends to the owners. The company's funds are not commingled with personal funds, so it's harder for your partner to take more than his share without explicitly embezzling (a serious crime). A company can also make tax filing easier, for example by making it easier to track how much of the rent money is used for maintenance and upkeep. An accountant who specializes in small businesses can go through the options with you and help you get everything set up. I highly recommend at least having a brief phone chat with one so you can get an idea of the possibilities. The Small Business Administration also has some useful resources, many of them inexpensive or free.

Going a step further, you can hire a property management group to handle everything associated with the property. They will locate tenants, collect rent, pay expenses, and all you do is sit back and collect a check every month. Putting a third party in charge would eliminate your partner's ability to steal from the company, but would require you to pay the manager a portion of your proceeds.

A more drastic option is to end the partnership entirely. You can buy your partner's stake in the business and manage the whole thing yourself. If they don't want to sell, you can alternatively sell your stake in the business to a third party and invest the money elsewhere. Your partner would have a much tougher time continuing to do what he's doing when he's now in a partnership with a disinterested stranger.

Given how long your partner has been taking advantage of you, it's unlikely that he'll stop anytime soon without you doing something fairly assertive. Even if you're okay with him keeping all of the profits, the way he's doing is putting both himself and you at risk of some nasty surprises if the IRS ever audited your taxes. It's scary enough that you said he only files his taxes "every couple years". Staying in this partnership in its current state is costing you money and putting you at risk. Your final option is to formally give your stake in the business to your partner and walk away from it. You'll lose whatever equity you have, but you'll avoid losing money every year on taxes, upkeep, etc., and you'll be free of the drama for good. You could consider this a one-time gift in lieu of continuing to support him on a month-by-month basis.

Answer 6

If your brother has been keeping all profits of a rental that you co-own, you are effectively supporting him. I would ask him to buy you out so he can continue to keep 100% of the profits. If he doesn't want to do that I would suggest you live in the apartment that you own, and offer to continue to support him financially, but it shouldn't be part of a rental agreement since you were supporting him before you moved in.

If I were in your shoes I would come up with an agreement separate from the house that you will be giving him $X that he needs to support his lifestyle/family/etc. with whatever terms you decide, so you can have the freedom to make whatever life decisions you need to for the future. Good luck.