Invest in Real Estate - buy house and Rent to family member???

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Submitted by 23109VC on February 18, 2009 - 2:42pm

I am hoping someone here is economically sophisticated and can explain why this would be a good/bad investment.

My parents are at retirement age. They own their home, and have roughly 1 million saved up. They pulled their money out of the market before it went way way down - and moved it to a cash account. they have a big fat pile of money, that they were going to invest for retirement, but now they are paranoid about putting it anywhere given all the economic uncertainty. My dad still works, making roughly $100k/year. they have a nice house in San diego / Scripps area they have owned for decades. bought it for 60k, now even zillow says it's still worth about 600k. they plan to stay there until they die..the taxes there are dirt cheap.

i am in temecula upside down in my house. i had this "scheme" in mind. it would benefit me - but i only want to present it to my parents if it would HONESTLY benefit them too.

I am upside down my house. i am trying to mod my loan, maybe it will work, ,maybe it wont. i have considered just living in my hosue as long as I can put off foreclosure, and stockpile all the money i'm saving. i could probably save up close to 50k between what I don't pay in taxes, mortgage,s insurance, and what i could save.

then, once they finally boot me out - instead of just renting - IF IF IF you all think this "is the bottom" or in about a year when I would be actually moving we are "at or near the bottom" I then get my parents to buy for cash - a nice house. say for rought estimates - they buy a house that costs $500k in TODAY's market. my hosue cost almost that in the OLD jacked up market. the house that costs 500k in 12 months will be ahosue that would have been 900-1M in the old market.

I then move into the new house and make payments directly to my parents. they retire, and use my payments as an annuiyt. they are leaving me their entire estate when they die. they are about 65 each. realistically, while i wish they woudl live forever, statistically, they won't be alive by the time the note matures..so i keep paying them - they get a gauranteed annuity, I get out of my upside down house - I get into a newer/bigger/better house for essentially the same monthly payment.

the risk to parents is what if I stiffed them? they could be holding the note, and have to foreclose on their son. i thought about giving hem the 50k i save up and they hold that like in escrow... then if were to default, they would have 50k of "my" money to draw on until the situation rectifies or I get out and they sell/rent it.

i havea gov't job in public safety, lots of seniority at work. odds of me being laid off are very low. the whole system would have to crash before i lost my job. no job is 100% secure, but mine is about as secure as you can possibly get. so they "risk" of me losing my job, defaulting, etc is low in my opinion.

i have a 1M life insurance policy, I could add them as a beneficiary if they wanted to esnure that if i died, they got paid.

the only contingency i couldn't really control for woudl be if I were injured to the point that i could not work, but was not dead - my work related disablity ins would pay 60% of my insomce until i reach age 65. so i might be able to keep making payments...maybe not.but there would be something coming in to at least cover the minimum jhntil I adjusted living arrangements and moved.

essentially, I see it as a win win. they put thei rmoney in the stock market now and what kind of a return would they get?they could lose even more.

if they put the money into a house - in this market, would you all say that the odds are the value will essentially be bottomed out in about a year?

even if the values stayed flat and the house didn't appreciate substantially - it probably woulnd't go down like the market has in the last year or two.

the benefit to me is getting out from under my huge upside down house - getting into a bigger/better hosue that would be bought at the "bottom".

the money is my parents, but it will be mine in 30 years - rather than my parents put the money into some investment account, or give it to some investment advisor to put it in his account and they see a 5-7% return annually - they can get the same return,i f not more - and the money benefits me/their son/heir at the same time it earns them money.

seems like a win win. what am i missing? are there negative or positive tax implications for this? i think the money is in their 401k program or an equivalent, but he moved the money from being in any fund to a "cash" type part o the program so it was NOT invested, hence his value froze and stayed stable as the market just recently dumped...

if he pulls that money to buy a hosue and then sell or rent - does he get mega penalties or can he avoid penalties by the fact that it is a new investment?

any suggestions - pro or con are welcomed.

Submitted by scaredyclassic on February 18, 2009 - 2:52pm.

the bottom could be 4 years out. the value could be 1/2 by then.

lack of diversification.

divorce?

earthquake insurance.

disability you covered. death too.

what if your job is safe but the govt cuts your salary in half?

old people shoudl eb conservative; it shoudl make sense whetehr they do it with you or a stranger.

Submitted by UCGal on February 18, 2009 - 2:54pm.

As someone who's dealing with older in-laws and lost both my parents I have a perspective on this...

Your parents are in good health now... but that could change and they might need the money for nursing care.

Even that big pile of money gets whittled down pretty darn quick by skilled nursing homes. What if one or both of your parents develops alzheimers - and needs skilled supervision for many years. They might not be able to pay for it. They would have to liquidate and burn through all their assets except their primary residence - including the rental home you're living in - before medicare would kick in to cover the nursing home expenses.

My in-laws are an example of this. Retired in their 60's... both had pensions, house was paid for, life was good. Then my father in law broke his hip. During the surgery something happened and he has aphasia (diffused brain damage). He's in a wheelchair now. All of their plans, expenses, etc have changed dramatically. Rather than staying in their lifelong home they had to move. Recently we built a companion unit (detached granny flat) that is handicapped accessible - and they moved in. Not the plan we had when they retired - but it works for us.

Your scenario is great for the most optimistic scenario - but it does not account for the twists that life throws at us.

It also strikes me as pretty selfish. But maybe I'm missing something.

Submitted by JustLurking on February 18, 2009 - 4:06pm.

This would not be in your parents' best interest. One million dollars is not "a big fat pile of money" if you plan to live on it for the next 30 years. There are just too many unknowns. Major medical and/or nursing home expenses in the future could eat through that in a hurry. Your "annuity" may not be enough for them. Then what?

I agree with UCGal - this also strikes me as pretty selfish. I cringed when I read the part about how the money is theirs, but will be yours in 30 years. Yikes! It is NOT your money. It may never be your money. They may NEED it. It is THEIR money, for THEIR needs - not yours.

Submitted by scaredyclassic on February 18, 2009 - 11:36pm.

1,000,000 at 3% interest yields 33,000. nursing home insurance = 10k a year?

prescriptions.

a movie once ina while.

Submitted by barnaby33 on February 18, 2009 - 11:50pm.

Unlike the others I think the basic premise is sound. Yes it does have a twinge of entitlement to it, but compared to what I'm seeing in the world today, hell you should nominate yourself for sainthood.

The major risks are them needing most or all of the money before they die, a not insignificant risk. Of course if you buy at or near the bottom of the market, its not a problem because its all up from there! The problem is knowing you've reached it and being able to solidly convince yourself and your folks that its so.

Finally what you are talking about is an inter generational loan. They always come with strings attached. I know my father was going to loan me 25k to buy a house. When he found out I was going to buy a motor cycle he told me he wouldn't help me buy the house if I did. Better know what those strings are, they can be more damaging than owing money.

Finally, weren't you the guy who convinced himself a year ago to buy a new tract home in Temecula? (7th circle of hell) If so do you really think you are in a place to call market bottoms?

Josh

Submitted by UCGal on February 19, 2009 - 9:54am.

scaredycat wrote:
1,000,000 at 3% interest yields 33,000. nursing home insurance = 10k a year?

prescriptions.

a movie once ina while.

Just a note on long term care insurance... It typically has a "lifespan" of 3-5 years. (Rates higher for the longer coverage.) If you live longer than the coverage - then... Oh well...

This can be a significant issue for someone with a debilitating, but potentially long term condition. Alzheimers comes to mind.

A coworker's mom is in a nursing home with alzheimers. She's only got 9 months left on her coverage. After that, whatever cash she has will go to cover the $10k/month rent.

My brother in law's mom is in assisted living here in San Diego. She waited to start the coverage - even though she NEEDED it - because she didn't want to outlive the coverage and be forced to move to a crappier place.

Long term care is expensive. Insurance for it is not unlimited.

As I said in my previous post - I've got a lot of experience with this because of my parents, my husbands parents, and various relatives parents.

Don't spend your parent's money because they may need it.

And it doesn't sound like a great investment.

Submitted by Nor-LA-SD-guy on February 19, 2009 - 10:05am.

Just remember everyone will twist the stats in the direction they feel will help them (even if they are only fooling themselves).

The fact is a lot of what happen from 2000 -2006 was due to what did not happen from 1990-1999 .

There just may be a bit of truth to this pent up demand thing in SoCal anyway.
Anyway good luck !!

And no people are not leaving Socal in droves.

Submitted by DWCAP on February 19, 2009 - 11:58am.

"......they buy a house that costs $500k in TODAY's market."

Please excuse the question, but why such a nice house? TG just bought a place that was under 300k if I remember right and it sounds pretty awsome. I dont think that guy has bad taste, so I wonder why you need such an expensive house. An intergenerational loan like you describe is alot easier on the parents if it is 250k (+your 50k saved from screwing the bank) than if it is 500k.

The other question you need to ask is how long your dad wants to keep working. If he wants to drop dead on the job, and is making 100k, then it isnt such a big deal. If he wants a long retirment, then that is a different story.

Stop looking at this from your point of view and look at it from theirs. If it is the best thing for them, regardless of your interests, and it helps you too, then great. If not, then find a new scheam.

BTW, my parents have done something similar with my brother (he was buying his first house), and it has worked out for everyone. It can be a good idea.

Submitted by jpinpb on February 19, 2009 - 12:46pm.

I continue to be blown away at people's mentality. When I sold my place in Carmel Valley, I bought a place for my mom in NJ free and clear so she wouldn't have to work. I am on the deed w/her, but I felt so good to know I'm helping her. She is on a fixed income.

Have you even discussed this w/your parents? Are they okay w/your idea?

IMO kids today rely way too much on parents' help. Should be the other way around.

Submitted by 23109VC on February 19, 2009 - 2:19pm.

I actually brought it up with my parents but not to benefit ME but to benefit my younger sister. she and her husband are teachers and make enough to afford a modest house payment, but not enough to qualify for a home in this market. they are renting right now.

i brought it up thinking that my parents could buy a house for THEM and then either "rent to own" or carry paper, or work out some arrangement where my sister and her husband pay my parents. my parents want to retire - and this would give them a vehicle to invest money in and get a monthly cash flow coming in. the big risk, however, would be if my sister or her husband lost their teaching jobs and could not afford to pay - then they'd have to kick them out.

i am in a house, and initially was thinking of this to benefit my sister. my parents are "thinking" about it. i honestly think they like the idea but are simply nervious about such a big investment that is not the "Norm". they are conservative, and they may see it as too risky.

once I started thinking about it - I thought, if they would do it for sis - woudl they do it for me. i don't NEED to move. yeah, i am a guy who bought in temecula a couple years ago and should have listened to all of you and NOT bought but i did. oh well. i like my house - it is nice, not as big as I would like for the long haul - but it is nice. if i am in my house for the next decade i am NOT going to be unhappy. but call me an opportunist, call me greedy - call it what you will -b ut if an opportunity came along to "upgrade" why not? so i thought, why not let my house go into foreclosure and take advantage of the fact that prices are so low.. i could just walk on my house and rent for a while. if my credit gets screwed b/d of a foreclosure i wouldn't qualify for a new loan if/when I decided we hit bottom and wante to buy again...BUT if a relative was willing to buy the house who has cash - they could cut the loan to me and carry the note and i pay them. no real banks involved, mom and dad would just act like the bank.

the $500k figure is way high. i just tossed that out as a rond number. i'd probably look at stuff in the 300-400 range max. my current house is nice, i like it, and probably only worth $200-250 in THIS current market at best...

on the surface it sounded like a possible win-win - but not bieng a financial expert (hey i bought when i shoudl have sat out - so I am not an expert) I thought i'd ask some here who have essentially proven to be "in the know" and see what some of you thikn about the idea.

i really like a lot of the info I obtained. i hadn't even really considred the whole long term health care costs, etc. i do know my parents have long term care insurance - but i don't know the specifics of their policies.

another idea I threw out to them - and this also has a win-win angle to it that coudl help and have it's own set of issues - i suggested they rent out their primary residence and move in with me - or in the alternative, we each move into another house together that is large enough to hold the bunch of us. i could dump my house and we could just rent a 4000 sq ft home and all live togther. my upside is having them in the house - i would have access to day car for my kidsd - NO not every day...but once a week or something - they are there and it woudl be much easier. upside - my kids get to spend a lot more quality time with gandma /grandpa. we are all very close and visit one a week or so - so living together might actually work - but with any co-living arrangment there are negatives to that. you can get annoyed with people you love once you live together...

big houses here in temecula that would house us all woudl easily rent for $3000? not that much. i could pay the bulk of it on my own - and they could move in and pay NO rent or only nomical costs. then they could pocket ALL the rent off their Scripps Ranch home - which is virtually paid off and worth about $600k - they coudl probably rent it for 2500-3000??? that woudl give them anice extra streamof income... but they woudl have to combine households...

if they did get sick or hurt - or were disabled, they would likely be able to live in the house longer - as they woudl have me, my wife, etc to assist them - unless they were so disabled htey required professional care...but as they age..and getinto their late 70s and 80s and assuming tey are inddependent, but just need minor "help" they would be in the same house and it would be easier to help them.

that was another idea i threw out as a way to help them retire earlier and cut costs. combine households... that would surely save money as they could rent their existing homeand profit off it.

back to my original idea - i hae another relative who is insanely wealthy. insanely. she is nto the kind of person to give money away and I would never ask her for money - she wouldn't just "give" me a half million - but if I came up with a full blwon contract, and it was "legit" and there was some benefit to her - either that the interste she woudl earn would be equal to or better than her other investments and she was sufficiently protected from the obvious contingencies - she might just loan me the money. she has money coming out of the woodwork.. literally millions. that is alway san avenue..but it would need to be worke dout by an independent lawyer/third party so that it was above board, legit and very business like.

thanks again for the suggestions. my main goal is to help my parents. they have this money sitting in an account gaining no interest and they don't know what to do iwth it. they are not financially sophisticated. they have thought about giving it to one of those investment firms where you basically give them your oney and they invest it and ge ta cut of the profits...but in this market - who knows if even the 'experts" know WTF they are doing and there are no gaurantees..they could lose it all doing that..

which is why i thoght somethign like this would have the money in someting tangible. like a house. the only real worry is that what if we aren't even at bottom yet and prices fall another 25% or 50%.... buying a house in Temecula now for $300k... coudl THAT house be $150k in another couple years? who knows..it could... then you've pissed away a lot of money...

too bad i don't have a crystal ball... :)

Submitted by JustLurking on February 19, 2009 - 4:53pm.

If you are sincerely interested in helping your parents manage their money, I would suggest that you put them in touch with Rich. I have not used his services personally, but I know many on this site recommend him highly. I am sure he would be happy to talk to them and offer some objective options that are truly in their best interest.

Submitted by scaredyclassic on February 19, 2009 - 5:21pm.

if i were old and had a million dollars, i would not know what to do with it. If I had to live off of it, I'd just be too nervous. personally, I plan to never retire. then you don't have to worry about whether you have enough to retire. I definitely wouldnt buy my kid a house. I would like to live with my kids though. I bet I could easily be talked into a group living situation that made sense. hell, I'd probably pay the whole thing. rent the s.d. house, move into giant temecula house, pay the mortgage with the scripps rent, you buy the food. i wouldn't feel taken advantage of in that scenario if I'm the parent. hell, i'd be kinda happy. I definitely would never trust any investment advisor whatsoever. No one. Everyone is an idiot. Anyone who professes to know does not know. the only person who can allocate your monies is you. that's my personal opinion.

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