Buying house from my mom and renting it back to her

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Buying house from my mom and renting it back to her

Nathan Trotter
Member since 2020 · 6 posts · 1 vote

Long story short, I am trying to run scenarios for purchasing my moms home from her and renting it back to her. Her current mortgage is 200k but she could probably sell as is for 325-350k. It could use a lot of updating but she could not afford to make the updates. She can’t afford a higher monthly payment and would prefer not to do a cash out refi. Her loan is not assumable.

The thought is that I could buy the house at her current mortgage rate and then rent the house back to her at a discount for a couple years so that she has a little more financial breathing room. I would also redo the floors, kitchen and backyard (est. 40-50k improvements) within a reasonable time frame.

She would get cheaper monthly payment and an updated house that she can enjoy more. I would be getting a good chunk of equity.

My question is: does anyone have any creative ideas on how we could structure this deal? This will be my first “investment home” and it’s obviously not a traditional route in that I would be negative cash flowing for a while with a good amount invested up front. Keep in mind I’m trying to help my mom, but I also want to make sure it’s a good deal long term for me.

Another thought would be to buy it for 250k with the idea that she would hand over the 50k payout to us to use for the improvements.

Any thoughts appreciated!

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John Carbone
Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
4y
Quote from @Nathan Trotter:

Long story short, I am trying to run scenarios for purchasing my moms home from her and renting it back to her. Her current mortgage is 200k but she could probably sell as is for 325-350k. It could use a lot of updating but she could not afford to make the updates. She can’t afford a higher monthly payment and would prefer not to do a cash out refi. Her loan is not assumable.

The thought is that I could buy the house at her current mortgage rate and then rent the house back to her at a discount for a couple years so that she has a little more financial breathing room. I would also redo the floors, kitchen and backyard (est. 40-50k improvements) within a reasonable time frame.

She would get cheaper monthly payment and an updated house that she can enjoy more. I would be getting a good chunk of equity.

My question is: does anyone have any creative ideas on how we could structure this deal? This will be my first “investment home” and it’s obviously not a traditional route in that I would be negative cash flowing for a while with a good amount invested up front. Keep in mind I’m trying to help my mom, but I also want to make sure it’s a good deal long term for me.

Another thought would be to buy it for 250k with the idea that she would hand over the 50k payout to us to use for the improvements.

Any thoughts appreciated!

Look up mark j Koehler (sp?)…he has a topic on this. Essentially I think anything below FMV each year can be treated as a gift from you to her as long as it’s under the 14k a year. And you should still get the deductions.
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  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    4y
    Quote from @Nathan Trotter:

    Long story short, I am trying to run scenarios for purchasing my moms home from her and renting it back to her. Her current mortgage is 200k but she could probably sell as is for 325-350k. It could use a lot of updating but she could not afford to make the updates. She can’t afford a higher monthly payment and would prefer not to do a cash out refi. Her loan is not assumable.

    The thought is that I could buy the house at her current mortgage rate and then rent the house back to her at a discount for a couple years so that she has a little more financial breathing room. I would also redo the floors, kitchen and backyard (est. 40-50k improvements) within a reasonable time frame.

    She would get cheaper monthly payment and an updated house that she can enjoy more. I would be getting a good chunk of equity.

    My question is: does anyone have any creative ideas on how we could structure this deal? This will be my first “investment home” and it’s obviously not a traditional route in that I would be negative cash flowing for a while with a good amount invested up front. Keep in mind I’m trying to help my mom, but I also want to make sure it’s a good deal long term for me.

    Another thought would be to buy it for 250k with the idea that she would hand over the 50k payout to us to use for the improvements.

    Any thoughts appreciated!

    Look up mark j Koehler (sp?)…he has a topic on this. Essentially I think anything below FMV each year can be treated as a gift from you to her as long as it’s under the 14k a year. And you should still get the deductions.
    2Reply
  • Dwayne Poster
    Investor · Van Isle · Member since 2021 · 455 posts · 226 votes
    4y

    Are you the only child?  Whatever the deal, she should be good with it, yes?

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    If you have siblings, you will want to talk to them.  If you buy it for less than fair market value there could be hard feelings.

    It can be hard renting to family. What happens if they don't pay the rent?  Make sure you treat it like a rental and not your mom's home.  If she's happy with how things are now, don't do any renos.  You will have a conflict as you try to update it for a generic tenant while at the same time she will want input as she will likely still see it as her house and she is living there.

    0Reply
  • Nathan Trotter
    OP
    Member since 2020 · 6 posts · 1 vote
    4y

    @John Carbone thanks! I will check it out.

    0Reply
  • Nathan Trotter
    OP
    Member since 2020 · 6 posts · 1 vote
    4y

    @Dwayne Poster I have one sibling but I have run it by them to see if they wanted in. They don’t have the cash currently but they were fine with it. I told him he could always buy in later on some sort of proration.

    My mom is open to the idea but wants to know all scenarios of the deal (up front deal, but also all of the clauses and what-ifs for the future if she loses her job, something breaks, I need to sell for some reason, etc..)

    0Reply
  • Nathan Trotter
    OP
    Member since 2020 · 6 posts · 1 vote
    4y

    @Theresa Harris

    Thanks! My sibling is on board with me doing this.

    Still trying to work out the details of what renting to her would look like!

    1Reply
  • Curt Smith
    Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
    4y

    Lots of issues here.

    #1, why get new debt, take over the current payments subject to, pay her her equity, or pay on a note to her.

    #2, she's to pay rent.  There will be a time when she stops paying.  Her social security + savings won';t cover it etc.  You will have some period, many years where you are paying the mortgage and not getting any rent.

    #3 the cleanest tactic is to put the property into a land trust, where you and your sibling are successor beneficiaries in some percent, 50:50...   Make sure she has a Will, but the trust and successor beneficiaries keeps the house out of probate.   But you buying now does too but sets up for inheritance arguments.

    #4 a story;   I put my mother in-laws house into a land trust, my wife and her brother as successor beneficiaries, me as trustee.  She passed,  my wife now controls the house.   At the same time I put in $100k of rehab into the house and had a security deed filed on the property, zero payments, 8% interest, to be paid off upon sale of the house some time in the future.   I also got a contract signed with my mother in-law (prior to passing) giving my wife and me 100% control of the house to run as a rental, 100% of the income goes to us, not my brother in-law, got him to sign too!!!!!!   We now run that house as a rental until some future date we sell then we owe my brother in-law 50% of the value at the time prior to me rehabbbing it.

    My point is we documented "papered" this deal criss-crossing and covering every scenario.  Nothing left verbal, everything in writing AND signed by the other heir when necessary.

    Best of luck with a difficult scenario legally and family agreement wise.

    1Reply
  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    @Nathan Trotter my thoughts are renting to my mom sounds horrible. I would either pay for her upgrades, rent to her for free, help her sell her house for the maximum amount available to her, or find another solution where the ENTIRE benefit went to my Mom and NOT to me. Maybe she should sell and downsize to something nice and updated.

    She birthed you, that’s all your entitled to.

    Irish Jones Realty4.947 Reviews
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  • Nathan Trotter
    OP
    Member since 2020 · 6 posts · 1 vote
    3y

    @Matthew Irish-Jones haven’t checked BP in a long time, but man this was presumptuous of you.

    0Reply
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