Purchasing a rental property from your parents

[Brian Bauk]

Hello everyone, hope everyone had an awesome Thanksgiving. I’m very thankful for everything that I’ve learned from y’all!

My parents own a lake house that they see as simply just being a burden. There was talk in the family about selling it after we had an issue with the well system... but in general they are motivated sellers. I, however, think this place is a gold mine. It has a fantastic view and sleeps 10 people, all on an acre of lake front property. I’ve expressed interest to both of my parents as well as my other siblings as a buyer of the place and it was actually very well received. I’m the only family member that has any rental management experience, but this is a little different story than my typical small properties. 

Without going into super sensitive detail, I just cannot afford to put a normal 20% down payment on that house and I need a new solution. I’ve heard of installment land contracts and have been exploring that. However, I didn’t know the legality of renting out a property that I don’t have a title to (and yes my understanding of ILC’s is that the title isn’t fully transferred until after the debt is paid? Please correct me if I’m wrong!). For what I think this place would bring in annually, it looks like a great deal and I could start building generational wealth for my newborn. I just need to find that perfect arrangement. If you have any ideas or suggestions, or even criticisms in my thought process, I would love to hear them. 

Thanks, everyone. Happy Thanksgiving!

- B

[Nathan Gesner]

Owner financing. Have your parents sell it to you for an agreed price. Put a smaller chunk down, like 5 - 10% so they have some play money to do what they want. Then make monthly payments to them for an agreed number of years. This reduces the tax impact because they only pay taxes on the amount paid each year instead of the full sales price.

Example: purchase price is $250,000. You put down $15,000 down-payment. You finance $185,000 at 5% interest, amortized for 30 years. Your payment is $993 a month to your parents.

They may consider a "balloon payment" after a certain number of years to help pay for their retirement play money or other goals. For example, you could agree to a balloon payment in 10 years when they are in a lower tax bracket and need a big chunk of money for a retirement home, travel, or whatever. When that time is drawing close, you go to a traditional lender and apply for a new loan. Use that loan to pay off your parents and now you have a mortgage with the bank.