How to buy a property with my parents money

Question

My parents are selling a second home they own and seeing what I am doing in Real Estate they want to loan me some money to buy a rental property so that they can eventually leave it to me and my 2 siblings. They trust me to do the right thing and have suggested they just loan me the money at 0% interest but I cannot figure out the best way for me to acquire the property, manage it and eventually transfer ownership to my 2 siblings once my parents pass. I have told my parents that I would manage the property and take a 5% cut of the rent to do so. The property would be bought and owned by an LLC that I would be the sole member of for now. Maybe I am over thinking this but I cannot seem to grasp how best to accomplish the goal my parents have while also making sure that I am compensated for my time. Any thoughts on how best to set this deal up from the get go?

Preston Dean · Answer

I don't think that you should expect to be compensated for your time. From what it sounds like your parents are giving you a once in a life time opportunity, that 0.001% of the population would get to do.

I would work with a realtor in your area and give them your criteria of what you want and go from there.

Brandon Turner from the BP podcast used to always say "When driving through the fog you have to keep driving to see 1 mile down the road. You can't see further into the fog unless you start driving"

You can't figure out steps 2-10 because you need to just take step 1 - IE finding an agent to help you or working with a wholesaler.

Frank Del Corso · Answer

Great info Scott, thank you for weighing in on this! Lots of good wisdom nuggets here for me to absorb. It seems that the best approach will be to have them own the property in an LLC. I will find the property and manage it for them at 10% of the rent (going rate in my market is 8-10%). I can bill them for lease ups and for handling repairs.

I'll just need to work out the mechanics of setting up the LLC and getting the loan for them since I have those connections and they want to remain as passive as possible.

Scott Trench · Answer

Lot's to consider here!

Lots of ways to invest in real estate. I'm a big believer in long-term buy and hold, with a property that positively cash flows with conservative assumptions, in a growth environment.

Your question indicates that you have a lot of learning to do and frameworks to build. But, the goal of transferring wealth tax efficiently from your parents to you is a great one.

Mechanically, I don't think that your parents will be able to both loan you money at 0% interest, AND put the property in their name (otherwise, they don't need to loan you money if the property is not in your name - they are buying the property?).

Let's break apart these two items:

1) A loan from your parents. You can structure basically any loan that you want with your parents, including a 30-year mortgage loan at 0%. It's a contract between two adults. But, beware - if your parents charge you less than the Applicable Federal Rate, the spread between the interest that they charge and the Applicable Federal Rate is considered a gift, and may be taxable. For a long-term loan to not be considered a "gift" your parents will need to charge you at least 3.72%.

If you take a loan from your parents, whether at or below the Applicable Federal Rate, this provides you with a compelling financing advantage on a rental, and it would be wise to seriously consider it.

2) Your parents buy the property, you manage it, and it passes to you when they depart. In this case, the loan becomes irrelevant. Your parents buy the property, using cash, debt, or whatever combination they choose. There is no loan to you. You manage the property, and collect some sort of management fee. If you do this, it is much more standard to take a 8-10% fee of the rent (this would be a market property management fee). Property managers also may charge for lease signings, renewals, a 10% fee for any construction projects or maintenance that they bill out to other contractors, and may in some cases retain pet fees. Because the goal here seems to be to transfer wealth from your parents to you, I see no reason not to talk to a few property managers, see what they charge, and charge near the high end (10-12% of rents) plus various fees for various services.

Frank Del Corso · Answer

Thank you Matthew, I am definitely leaning in that direction.

Matthew Crivelli · Answer

@Frank Del Corso

Purchase the property with an entity. Structure the ownership percentages of the company as you please. You can use commercial DSCR loans or pay cash if that's the plan. You could even go a step further by having the sole owner of the new LLC as a family trust, which could benefit your siblings etc.. etc..

Frank Del Corso · Answer

Thank you for this Alecia, having a third party handle the payments might be a good idea as a paper trail for each payment. I appreciate you sharing your experience.

Alecia Loveless · Answer

@Frank Del Corso I’ve had several informal “loans” from my parents over the years to buy various properties. Most of them have had paperwork drawn up which was easy as my dad is a lawyer which we signed and then just kept between us.

It all worked out fine and everything got paid back and resolved.

The first property was a bed and breakfast which my Ex and I owned and it had a funky payment schedule with $500 owed 2 months during the offseason and I believe $9000 owed each month during the peak of high season.

My only real regret is that we didn’t officially file the mortgages because every now and then when my mom has had a few drinks she forgets she got a check for the balance from the closing company for the bed and breakfast and got paid off and blames me Ex who she now hates for not paying her back and I wish I had proof that she did get paid back.

All the official paperwork went to my Dad since officially he had held the title.

You might consider actually filing your mortgage with a title company or something similar that would collect the payments and process them and then forward them to your parents for a small fee to keep everything cut and dried and have formal documentation.

Frank Del Corso · Answer

Thanks for the responses! Alex, I will be using a loan most likely along with a down payment with their funds. I will DM you about your programs.

Michael, That is some good info and if true perhaps we make the loan a nominal interest rate and start with a period of no-payments.

Alternatively, I wonder if a simpler solution is that we form the LLC together and they own 2/3 and I own 1/3 and the operating agreement could state the scenarios for ownership transfer. Essentially they are bringing the down payment and I am getting equity for the work of finding the property, renovating and getting it leased up. Then my parents can decide how and when to transfer their ownership to my 2 siblings.

Michael Smythe · Answer

Have them speak with a CPA as I believe if they "loan" you the money at 0% rate, the IRS will consider it a non-business transaction and may consider it a gift.

You should have a loan document with them and perhaps even have them put a private mortgage on the property.

Alex Hunt · Answer

Hi Frank, Here are some limited suggestions: -Draft a formal property management agreement between you (as the manager) and the LLC. Specify your responsibilities, including property maintenance, tenant management, and financial reporting. As agreed, take a 5% management fee from the rental income-Your parents can create a will or trust that outlines the distribution of the property upon their passing.Are you thinking of taking a loan out for this purchase? Feel free to send me a PMThanks,*