Buying parents home for a win/win?

Question

So I been thinking about this idea that would help my parents financial

situation a little bit and also help me gain access to money that would

help me start investing into real estate. I currently live with my

parents, they have about 3 loans on the house and different APRs and

another loan that is taken from their 401k totaling about 270k. The

house is worth about 800k. I was thinking of buying the house for 300k

paying off all their loans and also my car loan with the extra. They

said they would still pay the same amount and I would pay the mortgage

as well. Then I could use the equity on the house to invest and do fix

and flips or obtain more property. Would this work? would there be any

negative effects on my end or my parents end taxes wise or anything at

all? I would love some feedback and to talk about the possibilities of

this idea.

John Teachout · Answer

I'd be wary about getting involved in this situation. For the primary reason that your parents seem to have issues handling finances (3 loans on the house plus a draw against a 401K) I don't know their situation of course but if you buy this property expecting them to pay regular monthly payments, how do you know they will be able to continue to do that? And if they don't, can you make up the difference out of your paycheck? Sounds like it may be better for family relationships to find a different avenue to get into real estate. You also mentioned siblings and this could create issues in that direction too if one person thinks you're getting "more" than they are...

Royce Talbo · Answer

@Jessie Saribay Jr DONT DO IT.  you are putting your parents in a very bad place if you do this.  like you said you are new and you dont know what you are doing yet.  your parents want to retire soon right, if anything goes bad they could lose the house.  if not they would have to postpone their retirement, just so that you can have capital to start.  we are at the top of the market right now so trying to start when you are new doesnt make any sense. the chances of you losing money is very high.  if you were experienced then you could do this as you know the pitfalls, know what a good deal looks like and can calculate contingencies to cover when things go bad.  it takes years of learning and know what you are doing.  i guarantee you many investors will lose a lot of money in our next recession because they only started couple years ago and are gung ho leveraging more than they should or bought over priced property thinking things will keep going up just because they have been successful in an up market.

I suggest you have your parents refi to consolidate their loans since rates are so low right now.  or they could get a heloc, pay off all those loans and do the sweep strategy.  then after they could partner with you 50/50 on a project later on when the market is lower and you learned more. they being the capital partner and you being the partner that does everything.  this will also give them some extra money during retirement.

idk if i should tell you this as it might encourage you to go against my advice, but you can get a 250k deduction from capital gains if you live in the house 2 out of 5 years like it seems you do. if you are married then its 500k.  also read more in the gift tax, you dont actually pay anything as their is a yearly gift limit and then there is the lifetime gift limit. so once you use up the yearly you start dipping into the lifetime which is something like 11mil. once you used up everything then you have to pay tax. like i said it takes years to learn this stuff and even after 30 years you will still not know everything.  dont gamble with your parents retirement.

side note if you do this on your own you will be a better investor than if you were handed the money and you will feel more accomplished, good luck.

Jessie Saribay Jr · Answer

Account Closed Hey Mike! So I was thinking about the gift tax and they would pay the mortgage still and that would be considered gift to me and im sure itll be under 30k. The main reason why i wanted to do this was to get a heloc and use the equity to start my REI career hoping to do fix and flips to pay off the house and eventually give them the amount of equity in cash for when they retire! I dont think we plan on selling this house! we actually live in hawaii and its a really expensive market which is why I would want the equity to start investing! and the other part is that for my income i dont think i would even be able to qualify for 800k lol I would love for you to elaborate a little more about the 800k and 300k 1st and take back on the 2nd! Thank you for the information! I really appreciate it !

Account Closed · Answer

I applaud your wanting a win/win with your parents. However, if you buy the house for $300,000 your cost basis could end up making you pay a lot more in taxes than you can imagine when you go to sell. What you could do is buy it for $800,000 with a $300,000 1st from a bank and your folks take back a 2nd for the difference. That represents the true value of the home, and protects you in the tax arena.

Otherwise, it should work. I'd talk to a mortgage broker for the loan, a CPA to make sure your tax angle is covered and a real estate lawyer to draw up the paperwork. No need for a real estate agent on this one, that will only cost you lots of money and all of the details can be worked out by the attorney anyway.

Jessie Saribay Jr · Answer

@Duc Ong Thats kinda the reason I was thinking of buying I think I would be only to qualify for near the amount owed that why i thought it would be a win win, and from past problems ended up hurting their credit and financial situation.

Jessie Saribay Jr · Answer

@John Teachout They had the opportunity to renovate years ago and they did, and the 401k they needed it the reason I would buy for 300k would be their loans and my car loan. They would pay near the amount they would be but I would actually be putting some of it on the side for them for a little savings reserve. Out of sight out of mind . I would probably be paying 800-1k of my own on top of their payments. Theyre living basically paycheck to paycheck which is why I want to help them with their finances. So im the oldest of 4. Im only 23 and three younger sisters. Of course its what my parents want that we split it amongst us 4 when and if we decide to sell the property In the long run i was thinking if we get to pay it off we can either rent it out or sell and down size.

Jessie Saribay Jr · Answer

@Royce Talbo Hey royce, I know im new and I dont plan on jumping straight in with all that equity of course i would save while learning just in case anything goes down hill. Im not the type of person and put myself or family in a situation that could end up real bad. THey dont plan on retiring real soon maybe within the next 10 years. I want to accelerate that! Of course I just wanted to have the money in reserve just in case I come across a really good deal! Yes i did look into the gift tax the life time is about there and I think for 2019 it was 15k per parent and 30k total if theyre married. Of course doing this they would pay almost the same amount and I would be paying on top of that helping them get the loan down and paid off. Thank you so much for your input !

Jessie Saribay Jr · Answer

@Theresa Harris They wanted to do this instead of doing a refi or a heloc since they dont have the best credit right now. Im going to be living here for a while as well, they plan on passing the house down to me and my sisters eventually and when and if we decide to sell in the future it will be split amongst us. I dont know if you know hawaii but cost of living itself is very high and what I make could take years of saving just to get anywhere.

Duc Ong · Answer

@Jessie Saribay Jr I think @Royce Talbo is right. It's better to refinance the loan into a better deal now while rates are good. Then, they can loan you the capital needed to do a deal from the liquidity they gained. You can pay them a slightly higher rate than what they're paying to the bank, and that could help fund their retirement, while you get access to capital at much lower rates than hard money would be. The other thing to consider is what DTI is needed to get that liquidity out. That would depend on their and your income.

Theresa Harris · Answer

@Jessie Saribay Jr  Why do your parents want to sell or is this simply to help you get started in real estate?  I don't see the advantage for them to sell you a house worth $800K for $300K.  See if they can put you on the title and if that would allow you to borrow some money do help with the repairs on the house.

If you are working a lot of overtime and living with your parents, the other option is to save most of your income and use that to get started.  You can always start small and go from there.

Buying parents home for a win/win?

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