Can you be a tenant in a house you financed?

Question

My grandparents are in their mid 80s, sold their house last year to rent and simplify life. Their rent got jacked up because the market exploded, and now they want to live in a house again for rent control... but understandably want ZERO to do with taking care of it. They called me to see if I'd be interested in helping. I thought maybe this could work...

My grandparents open a promissory note to lend me the money to buy a house for them, and then move in. My property manager can take care of the place, absolving them of headaches. They would have to pay me rent to cover costs, but I would basically give most of it back to them with interest immediately (much more than they'd get on their crappy CDs) to cover the note. That seems necessary for the books to work, but sounds weird.

Does this seem legitimate?

Anthony Gayden · Answer

@Gabe Cinquepalmi

I never really liked the idea of renting to family, or of borrowing money from family for multiple reasons. Taking a loss on real estate to help someone is just not a good business practice. Also you owing your family a debt, or them owing you a debt, can ruin relationships and cause tension.

That aside, I think you would have difficulty securing a loan from the bank if you are using a loan as the source of your down payment. On all of the properties I own, they were very adamant about the down payment being 100% of my funds. Keep in mind that this was on residential 1-4 unit properties and conventional mortgages.

I think a work around for that would be if your grandparents were to "gift" you the money for the down payment.

Account Closed · Answer

I don't know.  I'd ask Chris M, who is a lender in Oakland.

I did learn from him on another thread that there is a FNMA program, where you can get owner-occupied financing if you buy a place for your parents (and I'd assume grandparents) to live in.  So, you could probably get a better financing deal with that program, than standard financing.

Anthony Gayden · Answer

That sounds like a very complicated situation. Good luck.

Gabe C. · Answer

@Anthony Gayden Yeah, working with family is definitely a fear, and I dislike the idea too. The situation with my mom is an insurance policy, so that she has a paid off place by the time she retires. You are also correct that this is not good business idea. For me, family trumps business. The alternative is to let them throw money away or stress themselves out trying to figure it out on their own. My grandparents are just physically and mentally unable to deal. The loss is minuscule to me compared to the costs I have in SF, and I see it as temporary sadly, due to their advanced age and deteriorating condition (my grandfather actually just had an ER scare yesterday, but they got him stabilized thankfully). I just want them to be comfortable. At some point it will turn into a cash flowing property because I will buy a place where the numbers work.

I can afford the down payment/closing without worrying about banks. My main concern was whether this was a legitimate thing to do.

Also, I don't think my mom would be psyched if they gifted me her inheritance. She would inherit the note the way I have it set up. :)

Gabe C. · Answer

@Anthony Gayden I'd probably put 20% down like a standard deal, so there'd be some benefit to them there. They'd be getting 6% on their money rather than the .5% in their CDs. Nothing would be in their name, besides the note, so they wouldn't have hassles with taxes, etc. They essentially would be paying a fee to cover the property manager costs, but no matter what they do, they are going to have some of that. They also wouldn't have to deal with the home buying process, which can be very stressful.

There are other aspects that I neglected to mention, so that it wouldn't get TL;DR, but they want to get a duplex and have my mom in the other side to help them out. My mom is already renting a TH from me at cost, so she'd slide over and I could get market rent on that TH allowing me to bump up the cash flow to subsidize her half and potentially some of the PITI... depending on how the numbers worked out. I'm already taking a loss on my mom's place for her benefit,  and don't mind doing that a little on this deal. I just can't go broke over it. :)

Anthony Gayden · Answer

Are you suggesting that they lend you the money for 100% of the purchase price of the house? They move in, then pay you rent to stay there, and you slowly pay off the loan to them? Meanwhile you do all maintenance for them?

I'm not sure how this benefits them versus just buying the house themselves and paying maintenance services. The interest that they earn on the loan likely will not cover the extra costs that you will charge them to cover PITI and maintenance for renting it back to them. Unless of course you take a loss every month.

Can you be a tenant in a house you financed?

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