Investing in a parent's home: can this work?

In My Humble Opinion
1

OK, before I begin, yes, I’m going to talk to a lawyer. I’m just soliciting ideas in case one o’ you have some insight that I didn’t think of.

Here’s the deal: my parents are in their early 70s, in reasonably good health, and have a decent income. They’re of the “pension and social security” generation, not the “401K and investments” brand of retirement funding. They have a modest but adequate monthly income, have some cash lying around (but not a ton), and have at least $100K of equity in their home, maybe more.

They’d like to have a bit more cash so they can travel and live it up some. They figure they have at most 10 more years before they become too frail and weak to do so. Their current monthly income doesn’t give them enough extra to do so, they don’t want to take out a home equity loan or refinance their house because they’d have a larger payment, and the cash/stock they have lying around isn’t quite enough to give them the extra cash they’re looking for.

Mr. Athena and I would really love to diversify our investments by investing in property. However, we don’t really want the headache of rentals, and we’re not interested in a second home. We do, however, really really like my parent’s house - my Dad built it from the ground up, and while it’s not grand, it’s solid and has a lot of charm and little extras (crown molding everywhere, high ceilings, etc.) If we were to someday live in that house, we’d be pretty happy there.

We’re wondering if there’s some way we can “invest” in their house (or really any other way - we’re up for ideas) in a way that protects all of us. We wouldn’t, for example, want to buy their house outright and rent it to them, because although we have a good income now, we have the type of jobs that would be hard to replace if we were ever to lose them for any reason. We wouldn’t want to, for example, lose a job and have my parents potentially lose their house because we fell into bad times. (We’d have to have a mortgage on the house - we have cash to invest, but not enough to buy the house outright).

On the other side of the coin, we want our investment to be safe. I know that nursing homes, for example, are very expensive, and will quickly go through any assets someone may have. We wouldn’t want our part of the home to be in any way able to be taken as part of my parent’s assets.

What would be ideal is something where we could, for example, give them cash equivalent to 20% of the value of the house, document it legally, and when/if the house ever sold, get the money out of it. It would be like a retirement savings plan - we know the cash would be tied up for many years, but eventually we’d get it and hopefully a sizeable increase in value.

So is this a crazy idea, or is it workable? Has anyone done anything like this before? Also - if anyone has any other better ideas, I’m interested. My parents need cash, we need investments, is there any way to make this work?

2

Are you familiar with the concept of a reverse mortgage?

It’s usually done through a bank, but you could probably enter into an agreement with your folks.

Of course, in 20 years, you might find yourself scheming to kill your mom.

3

Actually they’ve been considering getting a reverse mortgage through a bank.

I don’t think we really want to buy the house outright, though. Too many icky possibilities if something happens to one of us. We were more thinking of a way to give them a chunk o’ cash worth about 20% of the house.

Another question - Mr. Athena likes that his retirement savings and our house payment have tax benefits. Any way to do this deal and get a tax break as well?

4

Well… this really doesn’t (IMO) sound like a particularly good idea long term in that your ability to re-capture your investment under whatever investment or ownership entity you undertake is complicated by the fact that the people borrowing equity or cash from you are your parents, and if worse does come to worse you cannot (or would not even if you could) act vigorously to sell or take the home in order to protect your interest. If unforeseen bills do come due there will be the natural assumption that (as family) you can wait to get yours.

The bottom line is you are loaning money to your aging parents and your real world protection is limited. Unless there’s a hidden upside to this the risk-reward balance is not favorable.

5

Well, that’s what I’m investigating.

However, I don’t see this as dire as you paint it. What I’m considering is akin to buying a piece of property together. Granted, the property is their home, and that complicates matters in that we won’t be able to sell it as long as they are living in it. The only way we’d do it is if we had a legal interest in the property - it would never come down to unforseen bills coming due and “we can wait to get ours.” If the property was sold or foreclosed on, we would be legally entitled to a percentage of it. It would never be up to my parents or their estate - it would be ours.

At least, that’s the only terms I’d take. After talking to a lawyer this morning, it appears it’s possible. I’m just now trying to figure out if it’s smart.

6

My rule of thumb is that if you have enough money to invest, you have enough money to talk to a financial advisor. That said, you seriously need to consider the possibility that your parents won’t stay healthy enough to pay for the house as long as you hope–will you be out your investment then?

7

You also need to consider the possibility that the home might actually decrease in value. (Or might not increase fast enough to cover the interest on the loan you are contemplating.)

Could the equity vanish or shrink? (A prospect which might leave you without security for your loan.)

8

IANA lawyer, financial or tax advisor - definitely consult professionals about this.

A couple of thoughts. You didn’t say how much their mortage was, and you also don’t say if there are other heirs to be concerned with; I’m assuming that’s not a problem.

You could pay off your parents’ mortgage, which would essentially give them extra income. Or you could just give them the money as a gift.

In return, they give you title to the house - essentially “selling it” to you for a nominal sum. If you want to avoid capital gains tax, they could put it in a trust (“living will”) as going to you upon their deaths.

They stay in the house as permanent tenants until such time as that’s no longer feasible, but the house isn’t part of their assets (depending on the type of trust). You would need some agreement that you would finance their care if it became necessary, and/or would sell the property and split the proceeds if that’s what was needed to cover their care costs.

It’s kind of like an early inheritance, sort of. How much you gained on your “investment” would depend on too many factors to figure, so it might or might not be worthwhile for you. You might or might not be able to write off some expenses as “rental property”, depending on how you set things up. Again, definitely talk to some professionals.

9

I’m also no accountant, tax advisor, etc., but:

Someone who is pointed out that if you simply inherit property, you don’t need to pay federal capital gains on the increase in value since purchase.

10

I would assume that the house would be sold in this case, and we’d get our investement back.

Yes, that is a risk we would take. We’re OK with that (no investments are guaranteed to rise or even stay even).

We are not contemplating a loan. We would be investing cash that we would otherwise invest in a SEP or something like that.

We don’t have enough money to pay off the mortgage or buy the house. We don’t want to take out a mortgage because of the risk to them if we default.

We only want to buy PART of the house, not the whole thing. Well, we’d like to buy the whole thing, but we’re not that rich :frowning:

Yes, of course. But that doesn’t help my parents get any cash!

Thanks for the replies and keep 'em coming. I’m still on the fence as far as this being a good idea. So far:

Pros:

  • We get to diversify our investments and invest in property instead of stock, and we don’t have to be landlords to do it.
  • We get to help out my parents
  • We get partial ownership in a house we really like

Cons:

  • Tax benefits may be better on a second home and/or retirement account
  • There may be a risk I haven’t identified yet (this is where you dopers come in!)