Unique Investment Partnering Opportunity

[Jay Williams]

Hi everyone! I'm Jay and I recently just read How To Invest in Real Estate as well as Total Money Makeover (as suggested by the book). My husband and I own a 3-story end-unit townhome in Beaverton, OR, very close to Nike and Intel and have a unique investment idea we are hoping to get some insight on. 

As is suggested in TMM, we have been evaluating our debts as we create a strict budget. Our total debts (cars, credit cards, student loans, etc, not including our mortgage) is around $60,000. We have a $340,000 - 20 year mortgage (since we refinanced 6 months ago) and love our home and take pride in keeping it maintained and making small improvements on it. Thankfully we bought shortly after the pandemic hit, so we have greatly increased the equity in our home just by living in it over the last few years, even with it having slightly dropped the last couple of months. Based on the area we live and estimates of the home, we could sell it for around $450,000 today with the improvements we have made. 

Since we love our home so much and also want to get rid of debt, we thought of a unique investing opportunity. Until we bought our home in 2020, we spent year after year moving between rentals. Rather than sell our home and have to move again, we thought we would partner with a real estate investor, sell our home to them, and rent it from them for 2-3 years. Here's our thought process.

What we have to offer as potential...Investment partners? Tenants?...is some equity in our home and the desire to continue maintaining and improving the home helping to increase the value. We would be both the tenants and property management. We would continue to pay for all utilities, HOA fees, repairs and remodel on the home, AND we would sell our home for $400K-$425K, which is $25K-$50K under its current value. We have already replaced the carpet in the whole house with high end carpet and padding, replaced some appliances, had a brand new AC and heating pump installed, fresh paint on the whole interior, and redone the kitchen and bathroom cabinets.

We would like to keep our monthly payment the same as our mortgage, so rather than sending the $2600 to the bank every month, we would send that money to you. The only only yearly expenses to an investment partner would be the property taxes and home owner's insurance. The area we live in is very desirable since it is very close to both Intel and Nike, very close to the max station (public transit), and in a neighborhood that is continuing to grow and develop. At a 3.5% conservative growth rate per year, the home will be worth $480K in two years, most likely $500K with the improvements we have already made.

At the end of that 2-3 years, we would like the option of buying it back at the new market value. We may decide to purchase a different home at that time and it can then be listed and sold to anyone. Since we are contributing with any repairs, maintenance, and utilities, most all of the monthly rent we pay each month as well as the $75K or more in increased equity over that time would be profit to the partner investor. At the end of the 2-3 years that would be a profit of $96K-$120K. Using the equation in the BiggerPockets book, that would be an annual ROI of 10.5-14%.

Is this an investment opportunity that sounds plausible and/or that someone would be interested in? I would love to talk more with someone to flush out this idea and review my calculations. Thanks everyone!

[Mike Dymski]

Selling your home for below market value and paying rent instead of paying down the mortgage makes no sense (unless the property value is going to crater).

[Derek Bell]

Don’t do this. Probably the worst idea ever. But good way to start thinking outside the box. 

[Jay Williams]

That's what I thought at first as well. In our situation, however, the equity we get even selling it below market value would completely pay off all our debts, including cars and student loans which is the whole idea behind the Total Money Makeover. At that point we would be able to save around $50k per year to either reinvest in our home to buy it back or find something else. And at that point we will be entirely debt free, have 3-6 months in an emergency fund, and would have 100-150k as another down payment.

[Kyle S.]

I guess one concern I would have is that I don't personally trust that market is going to go up over the next 2-3 years. If I was a betting man I would bet it's going to go down. It looks like it's gone down 10% over the last couple months since the peak. I think everyone that has bought in the last couple years would love to keep the equity they had at the peak a couple months ago but I think most markets their equity is most likely going to go down in the very near future.