Over Thanksgiving my parents and I discussed the possibility that one day my parents might retire and move near us. Of course, my parents live in a “normal” part of the country where a 2-bedroom condo doesn’t cost $600,000. So the idea of us helping them to buy a home sometime in the future came up. If my siblings and I all put in an equal amount, we would simply inherit an equal share when the time came.
Coincidentally, I also ran across this article by the “Mortgage Professor” which addresses a similar idea: A new take on gift of equity: Turn it into an investment. Instead of a parent simply giving their kids money for a down payment which may put a dent in their own retirement savings, they should structure it as an investment with multiple shareholders.
He has made an Excel spreadsheet which tracks the percentage of home equity that is owned by each party. It took me a while to figure out all the variables, but here are the basics of what you need to consider:
- Ongoing investments. Sometimes you not only need help with a downpayment, but also the monthly payment. Or maybe you don’t need it but the investor wants to help out. Ongoing payments are also handled by the worksheet.
- Interest rate. You’ll need to set an rate of return for the investor’s cash if they “cash-out” before the end of the mortgage. One suggestion is to simply make it the same as the mortgage rate.
- Rent credit. If only one party is occupying the home, they should be required to credit to the investor a market rate of rent. The rent should include regular adjustments to keep in line with inflation.
- Property improvements. It should be decided how property improvements will be decided upon and how to credit each partner.
- Exit strategy. If you don’t plan to ever sell the house, then you should outline an exit plan so that the investor can get access to their money after a set period of time.
So let’s say an investors helps put down $25,000 on a $300,000 house. The assisting investor wouldn’t just be getting $25,000 + 6% a year, you’d also be collecting a portion of “rent” from the person you are helping. The occupant gets to buy their house with less money tied up initially, and would be sharing any potential profit or loss. Sure there is plenty of room for conflict, but I think for some families it might work out well.