Buying from a family member that wants to remain living in house rent free?

Question

Well I chatted with a family member that says the mortgage is too expensive to keep paying and they want to sell their 2 family.  They rent out half of if and want to remain in the other half, although they would no longer have to make any rent/mortgage payments.  They have a mortgage on it for half of market value, and would sell me the house for the payoff amount, then I have a house that I have to rent back to the seller for as long as they want (10-20 years) for free.  The other half of the house brings in monthly rent, but a new mortgage with PITI would be $500 more that the one rent stream.  Rent could stand to go up ~$200 if confronting the long term tenant, but how do I justify paying $300-500/mo for a house I cannot fully utilize for 10+ years?  Is this worth it from REI perspective?  Is it worth 10 years of maintenance/repairs to have the home equity that is expected by then?

Bill Gulley · Answer

Edited, Michaela, see you mentioned the reverse mortgage while I was typing, good idea!

First, this guess can be pretty close or way off, looking 30 years into the future is like that.

I have no idea what you did here, did you figure this after taxes, might consider depreciation, initially at cost and later at market, the loss of rents simply reduces income. Are you looking at the reduction of principal on that loan? Can you finance a straight purchase at 140Kor 145 with the seller paying costs and since they are family you can consider a gift letter transaction. You'll reduce the payment, probably to a positive cash flow.

Another option is to have them put you on title with them and refinance it. Then you can later purchase the one half undivided interest they hold.

I haven't gone through the brain damage about buying an interest as a wrap, but you'd want to have it refinanced as soon as possible. As a family member, you can also do this as an estate planning issue for the seller and avoid any due on sale issues. :)

Forget doing any note thing and making an easy transaction something difficult, kicking back payments one way or the other, that's  not really at arm's length and it's a tax issue.

Buy it for 140K ! You're in essence buying the one rental unit buying at half price. You have a negative cash flow and for that you are earning a future lump sum when you sell, so what is the return on that amount? You do need to look at this over a term certain, otherwise it's a mortuary table issue estimating when the seller might leave the property to a nursing home or passing.

What is the relationship, are there other relatives that could be involved?

While your seller wants free, will they keep the property up, pay taxes and insurance as is done with a reverse mortgage? Will they continue to manage?

Not enough information here really as to the real needs of the seller. Are they willing to move into another smaller home, as it puts both units in service and subsidize a smaller property? A shell game but you own all the properties.

You might run this by a reverse mortgage lender as it is an owner occupied single family dwelling, not sure if they would do a duplex, but it fits the billing. With such a bid, you can get a better idea of the seller staying there rent free based on mortuary tables that you can't really estimate.

So far, you're looking at this as an expense, but it's an investment made for the future lump sum. If I were buying I would not consider 3% appreciation, more like 1 1/2 over  twenty years lean more toward the reduction of the mortgage with tenant's funds and yours. :)

Michaela G. · Answer

If you decide that you don't want to do the deal, maybe you can suggest for them to look at a reverse mortgage. It will help them live in the property until they die and might give them enough cash to pay off the mortgage and some extra

Account Closed · Answer

Joe,

Say you spend $20k to remodel the other unit and increase rent to $1,100/month. Now you're negative $100/month. You then do a cash out refinance to pull out $50k to $80k in equity depending on the appraised value. That will cover many months of negative cashflow.:)

Of course your monthly mortgage payment will go up $250 to $400/month depending on the interest rate, etc. What's the interest rate on the current mortgage? How many years left on the mortgage? It's just number crunching here. Once you figured out all the numbers, make an offer on how many years you would allow them to stay rent free.

I've done business with family members, and it has worked out wonderful so far. We could be just lucky.

Account Closed · Answer

Joe,

It depends. How much equity are we talking about here? Are we talking about 10 years or 20 years rent free? It has to be a fixed number of years so you can back it out of the calculation. Would you exchange $250k in equity for $60k of negative cashflow for the next 10 years ($500/month for 10 years)? How's the appreciation in your area for the past decades? At a simple 3% inflation/appreciation, can this duplex be worth $650k in 10 years?

How many more years is the mortgage? How much is being pay toward the principal each month? Will this be a "subject to" deal or a straight sale at 50% FMV? So many questions must be asked before we can say it's a yes or a no.

That's how I see it.

Kyle Hipp · Answer

I would have to at least break even cashflow wise to consider it. Maybe have them locked in at a low $500/m rent with yearly increases of 3% as long as they would like to stay. It might seem ok looking at you chart but that doesn't include repairs and maintenance and it counts on a lot of appreciation. Also no consideration to increases in utility costs or more importantly property taxes and insurance. I always do my deal analyse with no appreciation figured in.

Joe Kato · Answer

Here is estimated equity from yr 1 thru 30 with same $500 loss per month for 30 years, 3% appreciation of house..

Michaela G. · Answer

Keep this in mind. I'm just guessing, since I don't know the market in your local area.

If you can buy a house 2 blocks from the ocean for 250K, then houses farther inland would probably in the 150-200K range.

How many people are there paying 1100-1200 rent in a duplex, if they could have a mortgage payment for the same amount , without neighbors? Rates are still pretty low and Fannie Mae has programs with 3% down.

So, while there might be tenants at $ 1100-1200 in your area, it might be the upper end of your market.

Again, I might be completely wrong about this, but it's something to be aware of

Joe Kato · Answer

Thanks for the replys.  Not immediate family..

Zillow says the house is $300K.  Could sell it right now for $250K.  Note payoff is $140K.

Rent is $700.  Could remodel the apartment and get $1100-1200 rent..  It is 2 blocks from the Ocean. Could fix up attic and make a balcony with water-views of the Atlantic.

Ben Reiss · Answer

The only way I would even consider this as a business deal would be if there was a set time frame. You will not be able to sell the property if there is a contract to let the family member live for free. So you will be locked in to this and not have an exit strategy other than rent at a negative cashflow.

Biz with family esp something where they are "gifting" you the property and then you "gift" them the rent can get ugly. If you ever have an issue on cash then you are the bad guy if you ask for rent or anything.

If this is someone in your family your care about like mom or dad then it's not a business decision and you are thinking of doing this to give them somewhere to live and then you inherit the property when they pass then that is another thing entirely.

How much is the house worth?

What would it sell for right now as is?

Where would they go?

Could you buy it form them at some discount and then pay then make a monthly payment on the difference?

I might be inclined to do this if they simply were holding back a note on the cash. If they would be able to get an apartment for 600-800 a month and we're talking a 100K difference in price then maybe you could work out an interest only loan where they sell under market but take back a second with interest only. I mean if they would take back the 100K then giving them 7-9% interest could be fair for both. they still get a place to live for life and you could write in that the mortgage is satisfied upon some such event or whatever.

Buying from a family member that wants to remain living in house rent free?

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