First-time deal between my father and I; How do we set this up?

[Nicole Heasley Beitenman]

My dad flipped a house that I would like to buy. He is willing to sell it to me at cost. I've been putting away about $500 a month to save for a down payment on my first investment property. Because he owns it free and clear, I'd like to set up an agreement where I pay him a small down payment, find a tenant, rent it out, and use the rental income + my current $500/savings (less a percentage for repairs/maintenace) to pay it off. I'd have it paid off way quicker than I would if I were to get a mortgage. I don't have the terminology for what we're trying to do. Would this be considered a land contract? 

He and I have only briefly discussed this idea. We need to run the numbers and meet with an attorney and an accountant regarding the contract and taxes. But we already have a potential tenant lined up who would eventually like to buy the house after renting for 2 years so we avoid the capital gains tax. 

My brain feels so scattered that I know this post will be as well. I guess the first thing I need to know is how to structure this deal so that the title and income are put in my name now allowing the 2 year clock to start ticking. 

Is there anything I'm overlooking? Is there a better way to structure this arrangement that we may be overlooking? This is a first-time thing for both my father and me, and it's very exciting!

TIA!

[Nicole Heasley Beitenman]

@Steve K. You're totally right about the capital gains tax. I had it wrong.

So here's a compressed version of the situation: Dad bought and flipped the house. Took longer than he budgeted. First buyer fell through. Now it's the end of October, and he's pretty certain any offers that come in will result in a loss. 

Prior to completing the project, he brought up the idea of me buying it as he knew I wanted an investment property. I didn't have enough for the down payment and he didn't want to wait for me to save as he wanted his full investment back. He financed some of the remodel so he has interest payments he's concerned about, he has no interest in (or patience for) being a landlord, and his emergency fund is wrapped up in the house (he drives a truck and often misses out on work in the winter because of snowy roads). So he decided to just put it on the market as originally planned; however, now that we're looking at the prospect of holding it all winter, he's becoming more flexible regarding potential exit strategies. 

A fellow investor friend had a potential tenant but no space for her, so he contacted me to find out if we would consider renting to her. The tenant would like to rent for a period with the intent of buying the property at the end of the lease. If this specific tenant hadn't been brought to my attention, I'd probably just rent the house out as a normal investment property. 

I suppose we could keep it in his name, rent it with me acting as property manager, start paying him my $500/month down payment savings, and then have it transferred into my name after he's held it for a year. Perhaps that would that be easier? 

[Basit Siddiqi]

@Simon W.

Hey Simon - I think the LLC route would work but I like the seller-financing route better.

The LLC route would be costly
$500 approx to have an attorney draft an operating agreement + create an LLC
$1000 approx to a bank for loan origination fees + home appraisal
$500 approx for annual bookkeeping + tax return prep fees.
$500 to dissolve the LLC

I am not an attorney so I can't speak on the liability protection side - but I would imagine there would be some protection with the LLC route.

[Steve K.]

So, @Nicole Heasley Beitenman , are you sure this is a "good investment"? You say your dad bought it to fix/flip, but hasn't been able to sell it, and now the profit margin is zero or possibly a loss. Have you calculated how well it will rent? And is it positive cash flow above and beyond all your expenses? What's the benefit of selling to the first tenant? Is it "appreciating" in the first year, such that it becomes profitable upon that sale? Or are you merely timing your local seasonality; avoiding selling in winter?

[Brad L.]

Unless I am reading your post incorrectly, I believe your statement on "avoiding capital gains taxes" is incorrect. The property needs to be your primary residence for at least 2 of the past 5 years to avoid capital gains taxes.

[Nicole Heasley Beitenman]

@Steve K. Based on initial interest in the property when it was first put on the market in August coupled with feedback we've received from viewings, we're confident the issue selling it is the timing. My dad should have had this completed in May or June, not end of August. We're in NE Ohio; no one moves in the winter here. 

@Brad L. you read it correctly; it was an error on my part.