Equity Shares Definition: Property Investment

Couple with part ownership in an equity shareThis term can be involved with shares and with real estate. Here we will be looking at equity sharing and property, not with shares.

Investors and occupiers basically share ownership of a property. They each contribute to the down payment, with the home appreciation, or ‘equity’, being shared between the parties on sale of the property.

The title deed to an equity share property defines the relationship of every owner to every other owner. If there are couples involved this can mean several relationships need to be stated on the one deed.

Australian expats and other non-residents often go into an equity share arrangement whilst they remain overseas. As it is sometimes more difficult for them to borrow as much of the property value, or to receive the same low interest rates as Australian citizens. This arrangement can make investing in Australian properties easier and more affordable.

When the property is purchased the parties decide on Ownership percentages. They normally determine this based on the contributions of the buying costs, also called the initial capital contributions. As an example, the investor could own 60% of the property and the occupiers could own 40%.

At the end of the term determined by the equity sharing contract, the investor or the occupier could become sole owners by buying out the % share of the property they do not own. With no buyout, the profit would be distributed 60/40 on the sale of the property.

There are two types of costs associated with equity sharing. Initial capital contributions as mentioned above, and additional capital contributions. These are reimbursed before profits are allocated and shared in any way the owners decide.

Property tax and insurance are not necessarily included as contributions as they are not part of the purchase costs, but may be considered prepayments of owning the property. If needed remember to factor in lenders mortgage insurance too.

Initial capital contributions include the purchase costs of owning the property such as the deposit, bank fees and inspection fees. Additional capital contributions include additions to the property that do not depreciate such as new bathrooms, kitchens and carpets. Other costs, including mortgage payments, property taxes, insurance and routine maintenance, are not shared. They are just paid by the occupier.

Tenants in common is the most popular way for unrelated people to create an equity share as it protects each party from seizure of their interests by creditors of the other owner. It also means in the event of the death of an owner(s), their interest does not automatically pass to the other party. If the deceased has a will it will pass to whoever is mentioned, if not it will do whatever is provided by law.

Joint tenancy is another way to own property. In the event of death the equity share will pass to the remaining owner, and not go by their will. As the transfer needs no will or court involvement, this is the most popular way for related people to sign up for an equity share.