Private Money Investor - First Investment Property

[Maegan King]

I am on the brink of purchasing my first investment property. Below are some of the stats on the property.

The home is currently occupied with an elderly tenant (92 YO) and we are looking to purchase the home well below market value. However the catch is that she want to remain living there (with her dog and cat) for as long as she lives. The house is in good shape and would require little rehab; mostly cosmetic issues. 

We are looking to purchase the house for $85,000 (Market Value on the house is $124,000) but will need a 25% down payment. We have an interested party (private investor) to secured the down payment for the house with interest gained on their investment. The problem is that I will not get alot of "cashflow" from this investment as long as the elderly tenant lives there, (I.E. we will only get $150/month cashflow which will be used as a maintenance fund)

The big question is how can I entice the private investor to commit. I am unsure how quickly we would be able to pay the investor back.

 Any advice is much appreciated.

[Bill Gulley]

@Maegan King

 Dealing with the elderly is very risky, not from the point of view so much of the elderly person, but their heirs. If you do a deal with an elderly person without the knowledge of the primary heirs, those heirs will just about always start kicking thinking granny was ripped off. Bet on it! 

Even having a relationship with her, which is very good, her heirs can untangle any agreement she makes if it is not at or near the market value. To a judge, the elderly are a protected class in reality. There are also "Elder Laws" that may be played putting you on the defensive. 

Another issue is Medicare, actually this is a risk for most people, but especially the elderly. If she isn't loaded with insurance and is wealthy, she won't have the funds to stay very long in an assisted living or nursing home and will look to Medicare to kick in to pay the tab.

I won't go into the assessment of assets for the determination of benefits, but her home that she owns and occupies as her residence is excluded. If she sells it, any assets she receives, cash, notes, horses, whatever, becomes a conversion and those assets are included in the determination. Medicare has a 7 to 10 year "look back" at transactions they can pull back for this determination. They can apply the value of those assets to the amount required to be paid by the client or her estate before she is eligible for benefits, and if they see that the transaction was done to avoid paying costs to  qualify for benefits the deal can be invalidated and that is messy. And all of this is not in your control.

If the heirs end up making up the difference from your price to  the market value, I suggest you expect a civil suit for your predatory transaction. Now, you're back to the judge and that "protected class" area and dealing with her competence, the heirs usually win if she doesn't appear in court.

You haven't shown her problem as to why she wants to sell. She knows she won't be around 20 years from now, maybe not 10, she could pass on any day. She may think having money would be easier to manage in her estate, and it would be. She may want to get out of the maintenance and upkeep, a common issue for the elderly.

You also haven't mentioned where the other $50K is coming from, if you expect to get a loan with the down payment borrowed, you'll have a problem without experience and other assets.

Paying back an investor usually comes from the future sale of a property or refinancing it as equity  is established with appreciation. You can't payoff a $35K loan with a decent interest rate in 3 or 5 years making payments alone, you'll be in a deep hole each month. 

As Dan suggested, she will probably be better off in a seller financed transaction. That note needs to be highly marketable since the payments can't pay for her future medical care, the note is usually required to be sold if she applies for benefits. 

She can also transfer the property to a Trust with her having a life estate. You can obtain the property through the Trust. Do not use a business entity like an LLC with her in that entity while living in the property.

I suggest you do two things. 

First, you and she need to see an attorney, she needs to have her affairs in order, call it some estate planning and she can pay for the costs, or you can or both of you can, but the attorney can only represent one party. 

Secondly, get the heirs involved, at least inform them that granny is selling the house and is going to an attorney with you. First thing they want to know is how much, so be prepared to justify the price. They may not care. They usually don't want to pay for maintenance on a property or make repairs, unless they grew up  there and expect to move back, but that isn't usually the case. Be positive in solving their problem they don't see yet and the owner's.  

Dealing with the elderly is a totally different ball  game in real estate and there are mine fields that new investors need to recognize outside the RE strategy game. See an attorney! :)