What is a fair way to split the profits for a co-owned property?

Fair is obviously in the eye of the beholder and whatever the four of you agree to is, by definition, fair.

Were it me, I'd do something like this

• Initially, sister and brother-in-law own 500,000/ 2,175,000 = 22.98% of the house
• Initially, you and your partner own 100,000/ 2,175,000 = 4.60% of the house
• Initially, the bank owns the remaining 72.41% of the house

When you sell the house or when you want to re-assess

• Determine the amount of the house the bank still owns (outstanding mortgage amount/ 2,175,000)
• Whatever ownership percentage the bank has lost is split evenly between the parties. So if the bank's ownership is down to 60%, both couples get an additional 6.2% ownership.
• Determine the house's current fair market value (FMV) and multiply by each couple's ownership to determine the value of each couple's equity. If the house in the future is worth $3 M and you have 4.6 + 6.2 = 10.8% ownership, your share of the house would be worth $324,000.

Whether or not the spaces are shared seems to have little to do with your actual question, and I agree with the comment that you mixed past and future tenses.

I don't know why you would wait until after the property has been purchased to start thinking about a profit-sharing agreement.

The only real issue here is the down payment differential, which becomes less significant over time as mortgage payments are made at an equal split. Why is this true? Well, because the total of all payments grows over time, with the down payments making up less and less of the overall total paid (down payments + mortgage and expenses).

I suggest that perhaps you could offer to carry a larger-than-half share of the mortgage until you've made up for at least some of the difference between your down payment and theirs. So for some period of time, you could pay 60% of the expenses, for example. Or, you could offer to pay the property taxes (if they're separate from the mortgage) and insurance for a period of years. You would have to agree upon what's fair in that regard, since making up $400k could take awhile.

Much of this assumes that things remain amicable between you and your sister and brother-in-law, but as is often the case, those bounds are severely tested when it comes to property and money. Hopefully all goes well!

It's completely bizarre that you are putting down different amounts of money.

That would be "insane" and the only thing that can be said about that is:

"don't do it."

There is - simply - no way to price capital.

Further - this shouldn't even need to be mentioned - this entire deal hinges on the overwhelming figure in the spreadsheet: the implied rent benefit.

Everything else is small potatoes.

Have a guess in which direction each party will want to nudge that.

Run don't walk. Forget this idea.

Note that if there was a small difference in capital, the answer would be "RUN".

The fact that there is a multiple difference in capital is just bonkers.

If I misunderstood your description, I apologize.

The fairest thing would be to

• form a kind of community (call it as you like), and be it only in the form of a shared account
• treat the downpayments of each couple as a contribution to that community

Then pay a kind of "rent" 50/50 which covers mortgage payments, utilities and maybe a certain saving amount for repairs etc.

How you treat the downpayment is up to you again:

• either treat it as a long-term investment and credit it with interest for each couple
• split the payment in a way that reduces the difference in amount
• or treat it as a loan and pay it from one couple to the other.

The long term goal should be that every couple has contributed in an equal way.

This assumes each of the couples have their finances combined. If they treat their finances separate from each other, do the same with 4 participants, or virtually form two other communities, representing each couple separately.

A. You should not do this. B. You are talking about profit, but no guarantee of that. Could be a big loss.

If you want to do it though, it's actually pretty simple: Each party (couple?) should put down the same amount of money and be equal owners, sharing equally in any (possible) later sales proceeds. Your brother should loan you $200k on the side, so that you can both put down $300k. You'll be paying that loan back separately, and in addition to, the mortgage. Keep in mind that you will still owe your brother that $200k regardless of what happens to the price of the house.

Also, no need to handle this through the actual purchase. You can each just put in the money you have as planned (500k+100k), handling the loan part privately. But WRITE IT DOWN. Interest rate, payment schedule, what happens if you can't pay, etc. You could even set it up as a no-payment loan, with interest accruing monthly and just getting added to the balance, until you sell later. This is very risky though, as you could end up with a loan that exceeds your share of the equity, which would make it very hard for you to sell.

Setting aside my opinion on whether or not this is a good idea, I think it's actually very simple.

You keep track of amount paid for mortgage, improvements, and anything that increases the value of the house. If/when you sell, you total the amount you put in for the down payment and the other tracked expenditures, then divide by the total both parties put in.

Example:

You put in $100,000 for down payment. The monthly mortgage payment is $9,000, which you pay $4,500. At some point, you want to renovate the living room. Your sister and brother-in-law agree with the renovation but don't want to spend the money so you pay for the entire job, which is $20,000.

After 4 years, you decide to sell.
You and your wife have now put in 100,000+(4,500x48)+20,000=$336,000
Sister and BIL have now put in 500,000+(4,500x48)=$716,000
Combined, that is $1,052,000

You and your wife should get 31.9% (336000/1052000) of the profit
Sister and BIL should get 68.1% (716000/1052000) of the profit