Unusual purchase plan- discounted price for free rent. Feedback?

Question

I have an idea that is either crazy or brilliant, and would like feedback.

Nutshell: Find older (70+) cash-strapped homeowners with lots of equity who want to stay in their home. I purchase the home at a substantial discount. In exchange, the former homeowner lives in the home until their death rent-free. I perform repairs/maintenance on the home for the life of the former homeowner. When the former homeowner dies, or leaves the property to live in assisted living/nursing home, I take possession of the property. I then turn the home into a rental, or sell it for a profit.

More details: I calculate the life expectancy of the homeowner. I offer to purchase the home for a discount equal to the expected cost of PITI plus repairs/maintenance for the life expectancy of the homeowner, plus a margin for profit.

I have the option to refinance the home to pull money out of it after purchase to finance other real estate deals. This creates access to capital.

Potential benefits that I can think of:

-Very stable tenant.

-Less repair costs, as elders are generally gentler on the home than families.

-If the person dies sooner than expected, I pocket the profit.

-Often a persons last years are in assisted living, a nursing home, or with their children, so I could take possession of the home (and generate profit from it) sooner than the persons death.

Potential risk that I can think of:

-Higher out-of-pocket costs/negative initial cash flow with delayed financial reward.

-If the person dies later than expected, I face a financial loss.

-I would need to hire a Real Estate Attorney to draft this unusual purchase contract, and that would be an extra cost.

-It may be difficult to locate homeowners who would be interested in this arrangement.

OK BP Community- What do you think? Don't hold back, I'm open to all kinds of feedback.

Vin Soando · Answer

Hi Julie,

We’re looking at a very similar situation with a house owned by an estate where one of the family members wants to remain in the house but at a significantly reduced rent rate. We’ve negotiated a 20% reduction on the asking price with a 3 year leaseback option at $0 rent.

My concerns and please share with the forum if you’ve researched the issue are:

1. Potential tax issues with the free rent. If the free rent were considered a gift or was taxable that could be a complication.

2. Tenant protection issues - We’re in CA and introduction of limits on rent increases so want to be sure that we have the lease structured so the tenant reverts to a market rate rent at the end of the 3 year period or moves out if unwilling to pay that rate.

I’m struggling with the 3 year lease being long, I don’t think I could enter an indefinite (til death) lease.

Another thought what if one spouse dies and the survivor remarries a younger person? Would that new spouse have the right to retain possession? This likely will vary by state.

I do agree with you there is some definite potential to this approach especially for buyers with high incomes (and high tax rates) and looking for post retirement income streams.

Vin Soando · Answer

Providing an update on this as we ended purchasing a house with these circumstances are are considering doing it again and thought it might be helpful to share the experience and how the concerns I noted at the time were addressed.

Our scenario - Purchased a SFH in CA for significant price reduction with "free" rent to seller's brother for 3 years.

1. Tax issues - The rent free situation was not considered a gift and there was no reporting requirement according to our accountant.

2. As the property is a SFH (Single Family Home) it is exempt from the most restrictive rent control measures in place.  We also noted a specific market rate rent in the lease and noted that it was waived for first 3 years.  We also had a specific end clause to the lease at the end of the 3 year period so the tenant would be forced to relocate or renegotiate at the end of the lease.

Our tenant ended up passing away half way through the lease.  There are survivor benefits in CA so if our tenant had married or had an heir who wanted to reside in the property, that person could have taken over the lease.  This was not an issue for us fortunately but something to plan for.

The house is now in the process of being sold and we will do an exchange into another property.

As there is no cashflow during this period this may not be an ideal scenario for everyone but we are all cash buyers building out a portfolio that will provide income to keep our current living standards once we retire from our day jobs in 5-10 years.

Dan M. · Answer

I mean I guess as long its all legal I guess it could work. Its essentially the same as a reverse mortgage. I think you might put yourself up to legal risk from the family once they find out they aren't getting the house and take you to court for them singing under duress or another circumstance where they were not of right mind. However it could work potentially as long as its ethically done. I would think you would need a pretty large bankroll to start with this as presumably you would take over any mortgage payments and maintenance and have no income coming in from it.

Unusual purchase plan- discounted price for free rent. Feedback?

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