Help Your Family Buy A House – And Make It An Investment

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.

Comments

  1. Have they considered renting? Here’s one pro-renting article by MMND: link

  2. and how would the tax man view such an arrangement? i suspect one would need a lot of accounting CYA paper trail to prove none of this arrangement is a “gift” or “above market interest rate” that was specifically designed with the primary intention of deceiving the IRS, rather than a synergistic multi-generational investment. my cynical view on it is that if one is rich enough, one can afford a phalanx of accountants and lawyers to justify pretty much any financial maneuver and thus gets left alone; but us small fish with no legal or accounting background make easy IRS “have to meet audit quota” prey.

  3. You should look up Muslim banking. When taking out a loan it works on the same principal but with the bank instead of your family.

  4. Mixing family relationships with financial ones is a surefire way to ruin both of them. If you can not afford a house on your own, don’t buy it. If your parents want to invest in Real Estate, they should buy REITS. If they want to help you, they should gift you the money.

    Any for god sake, why do you want your parents living close to you ? Dont you watch Everybody Loves Raymond ?

  5. Graham Lutz, The Young Capitalist says:

    If only your father-in-law did everything you told him to do! …what a wonderful world this would be!

  6. John, Hows your House hunting going along? IMHO You probably should wait till the real-estate market crashes further…

  7. K beat me to the tax issue. Taxes should be first on your list of things that need to be discussed WAY BEFORE you even decide on the house to buy. My feeling is that you are opening yourself up for a LOT of audit pain if even one of you treat the data wrong. You have the income aspect of the rent alone that would be very tricky. Then you have the capital gains when you sell the house. The auditors are going to love you.

  8. Fiscal Musings says:

    An interesting scenario, but rare is the family that could actually make it work. Money issues are just far too often a source of conflict within families, and it’s unfortunate. If you were able to make it work, however, it would probably be a great idea.

  9. I was going to mention the tax implications of such a plan as well, but that has already been addressed. I also see serious intra-family problems arising from such a situation. The author of the article did not even mention the problems that will arise over ownership. Is this done through a partnership, an LLC, a corp. If not, then will it be held by the occupiers as well as the “investors” as tenants in common? If that is the case, then even more potential problems exist. Just because on the closing date everyone thinks they know what they agreed to does not mean that same interpretation will be shared among all potential “owners” over the entire time the property is owned. What if one investor wants to cash out and no other can buy them out, might that force a sale when those occupying have no desire to move. I have to agree with Jon that this is one way to certainly strain family relations. Once all the technical legal (be it ownership or tax) implications are taken care of, most likely any capital gain or interest paid on the money invested will have been wiped out by the cost of such an arrangement. Wouldn’t it be easier for the parent to give the money as a gift or just lend the money with the understanding that when property is sold they will be paid back.

  10. I think investing using your parents’ money is a huge challenge and to add your siblings to the mix, it’s never a good idea. On the surface, aside from the tax issues, it sounds like a logical thing to do. Unfortunately, with human emotion, nobody can always operates “logically”.
    Moreover, if your siblings are married or will be married, you have to add their spouses to the mix….oh my God.
    No matter how “profitable” the investment is, it’s not worth the troubles.

    JT

  11. Biginvester says:

    Will the story of John Beck help you to buy a house from the property tax foreclosure sale?

    John Beck gives his promotions every Sunday morning.

    It seems to me a too good to believe story.

    How about you guys?

  12. RothNovice says:

    what if one of the siblings want to cash out when others are not ready?
    when siblings get married, the relationships change. And if other siblings got together and paid out the one sibling who wants to cash out, what is the fair value? zillow? full appraisal value? how about realtor cost? none….but when u finally sell, u will be faced with it. too many complications for sure.

    this is one of those…nice in theory, disaster in real life.

  13. Some of you guys take taxes way to seriously.

  14. Interesting that Richard Branson used money from his aunt to keep his young record company afloat. I didn’t know he bought CircleLending. They seem to be a good resource for documenting such transactions.

  15. Actually, my siblings(two sisters) and I thought about the same thing, buying my parents a house as a gift, and it is kind of investment for us. We will pay by cash, less complicated this way.

    And for tax issues, it is not that bad either, since my parents are in China. It is a different kind of system

  16. My parents don’t own a place and I’ve considered doing this with my brother- I’m more than happy to pay for the down payment and actual mortgage while my brother pays the maintenance fees while my parents live in the place… this would be for a condo in a pricey city (Honolulu). Sure my parents won’t be paying a dime, but they are my parents and for all that they’ve done for me this is the least I could do; plus at the end the place is in my name.

  17. If you have sisters it won’t work, trust me…

  18. I’ve actually thought a lot about this same arrangement, but with a group of close friends. The main problems that are holding us back is addressing the tax issues, the ownership and management aspects of the investment, as well as verifying that all parties have dedicated emergency funds to address any problems over the life of the investment, without encroaching on too much privacy.

    Does anyone know what the technical jargon for this specific tax issue? We are trying to find a real estate lawyer, but we don’t want to spend too much before we even decide to go forward on this investment. I think having even a vague idea of the technical tax jargon can help us identify the right attorney who specializes in these type of transactions, and help us get the best value.

  19. How do I purchase a foreclosure with a low credit score (570) and no money down. I am self employed

  20. annelise says:

    we want to help our daughter and husband buy a first home for them but do not know what would be the best way to go about it. I would like to just gift money to them for a downpayment but my husband wants it to be an investment towards their mortgage, leaving the kids the only owner and with us providing financial security to the bank in the form of money invested with them for the period of the bond. Can something like this actually work and how do we go about it. I really do not want my son in law think we are interfering, just need some info

Speak Your Mind

*