Should I buy my parent's house for the equity?

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@Nicholas Rice I understand how my post could have been bothersome. Glad we have more facts now and we understand that it isn't sentimental value. I struggle wrapping my head around a non-cash flowing investment. What I'm hearing is that we're aiming for appreciation exclusively and I always hesitate to put all my eggs in that basket.Let's talk about this in a business sense. You obtain the property and can't flip it because that's not what mother in law wants and deal will be denied if that's the end game. I understand that difficulty. However, you say that you have equity once you take title because she would sell you the property below market value. Great. However, given the calculator, the cash flow on the property is poor. This tells me that there isn't opportunity to refinance or take out a second loan without needing to "feed" the property aka negative cash flow. If you cannot benefit from the immediate equity, does it really mean much? Would you be better off trying to find something that would both cash flow and appreciate or at least cash flow and ownership? Don't get me wrong, appreciation is great. However, push comes to shove, I choose cash flow over appreciation especially at that price point. It's a question a lot of investors struggle with when identifying a property: cash flow versus appreciation. Your caveat is at what point can you gain access to your equity either via sale or an increase in rent enough such that you can take out a second or refinance on the first and not be cash flow negative. I'm sorry my first message didn't come across well. In my opinion, when someone is faced with a difficult scenario, the simpler and more black and white you can structure things, the clearer the picture and easier the decision. I hope that makes sense and that you can appreciate why my message may have seemed cold.

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@Nicholas Rice you've already answered your own question: you're conflicted because it holds sentimental value. That will always cloud your judgement. If it doesn't cashflow well, but you could flip it and take the equity and get started on something closer to home (reducing your management expense and gaining some hands on learning experience), your decision should be simple. If you're hesitant to do so because of the sentimental value of the property, you're not ready to make those tough decisions. If you're going to be an investor and treat your money like it's a business, you gotta be able to put your money and decisions where your mouth is. Continuing to use sentimental language, how are you going to feel when your management company accidentally places a bad tenant and breaks something or doesn't care for the property the way your mother in law did? Are you going to be able to fix it and move on or are you going to be up all night mad at both your management company and tenant? I've had a tenant break a sink on me and then tell me it was my fault because it was a piece of shit. The sink wasn't a piece of shit, it just wasn't meant to be sat on. I fixed it on my dime and told the tenant that the next time he gave me a "gray" area of responsibility, I wasn't going to pay for it. A few months later a window broke and the tenant paid for it. This is assuming you make the wrong decision and you keep the property as a rental. Are you prepared for this? To me, I'd say no because you've already expressed the sentimental value. Unfortunately no bank cares about your sentimental value and neither should your pocket book. Sorry to be the bearer of bad news. There will be other opportunities.

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Here an idea. You could find a way to buy it using private money at 250k. A few days later, just ask the bank to finance the property so they will finance base on the fair market value of the house instead of financing on the original purchase price. You would only pay interest for a short period of time to the private lender (don't forget to consider possible penalties), but you would probably get financing from the bank that is equal or over the 250k you paid for. This way, you could potentially have the house with no money tied up into it and use your 20% down money to buy another property.This kind of strategy works well here in Canada, but I cannot confirm for the US market as banks tend to be a little bit different. Maybe other BP members can confirm if it would be possible or not.

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What you are basically doing is stealing money from your mother in law. Not a good idea. Regrettably sentiment has blinded your rational thinking. You are not investing, you are buying a home.Additionally it is a terrible investment as a rental property. Rent to value is far to low and will not ever produce positive cash flow. In other words it is a loser.Do your mother in law a huge favour and let her sell it at market value and have her loan you money to invest from the proceeds. That would be a win/win for all parties concerned.

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Nicholas Rice I️ would flip it (if you could get it so steeply discounted.)

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@Nicholas Rice mind if I ask why your MiL is willing to give you such a sweetheart deal on the property, but doesn't want you to flip it? Are there any other contingencies on purchase?@Guillaume D. does have a good idea, I will caveat it with the fact that the bank may require the title to season for a certain amount of time before they do a HELOC. If you go that route make sure to speak with a banker before you buy. While you may not be sentimental, your MiL most likely is and all of the same concerns from @Kristina Heimstaedt's post still apply to her. Personally, my relationship with family is worth more than $70k. Its a bad rental with lots of baggage and the potential for more in the future. I'd walk away. Also,if you on sticking around BP, get a thicker skin. You posted asking for advice and people gave it. You may not like or agree with what they have to say, but you asked for it and they took time out of their day to give it. Don't get defensive when someone uses the information you gave them to try and help you.

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Hi @Nicholas Rice, my husband and I partnered with my parents. They got a secure line of credit on their house and we used it for down payments on several investment properties. My parents are equity partners in these deals and our agreement is that they are silent partners, meaning that my husband and I make all the decisions. I just wanted to mention this because in many cases family is your best ally and they wish you nothing but the very best. Thanks, Anna

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@Kristina Heimstaedt I should have been more clear and given more information right away to avoid any confusion. I really appreciate your response, I did not consider that refinancing would cause negative cash flow. Based on what you and others have said, I am really starting to see the pitfalls this property could bring me down the road. Thanks for the help!

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@Jeshua Patrick That's a great point, what if the market changes. I could be stuck with no equity and a bad rental property. Thanks!

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Nicholas Rice I think that what Thomas S. was trying to saying is that she would probably feel like you stole from her if you bought it from her and flipped it. This assumes that in its current condition it is worth the $320k without repairs. Even if she offered it to you of her own accord at that price with no conditions the courts would likely be more likely to believe her if she changed her mind later and claimed you manipulated her. Clearly she would feel this way based on her conditions of sale. Family/friend deals are often tricky because of this. I did a deal on a motorcycle with a friend who was not mechanically inclined. He wrecked it and didn’t want to claim it on insurance. I bought it on a gentleman’s agreement and he owner financed it. I then repaired it and flipped it on EBay a month later for a $1k profit. My roommate at the time told him what I was about to make on it as they were also friends and he got mad and tried to steal parts off it to extort more money out of me while I was at work. I had to lie and tell him I would give him his extra price so he would return the parts and complete the title transfer to my buyer. I didn’t like lying to him and he was mad I didn’t pay him the extra and our friendship was never the same. That was only over $1k. Your deal is $70k. I would tend to lean towards encouraging her to sell it at market value and then loan you back the $70k to use on a property that makes sense to you. I would also be very careful playing the equity game as markets can flip quickly and if it doesn’t cash flow then you could suddenly find yourself underwater as happened to many folks in the last crash.