Author Topic: Big offer from the Father....  (Read 1926 times)

brickholz

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Big offer from the Father....
« on: November 19, 2012, 10:39:18 PM »
Hey guys, I'm looking for a little Mustachian input.

My father is a landbaron in Omaha. He has 6 rental properties to his name, and they are all, as he puts it, "cash cows." They're all in the same neighborhood, and they have a homeowner's association that makes them effortless to manage. The houses cost around $130,000, and from each property my dad collects about $1200/month.

 He gets no phone calls from angry tenants, ever, and no tenant has ever missed a payment.

Sounds amazing, right?

Now Dad just called me this eve. He's going to buy another property in the same neighborhood, and he wants to put my name on the lease.

I think he has enough money to pay for it up front, and I think in effect I will just be paying him "under the table" for an increasing percentage of the home equity, as well as an increasing percentage of the rent.

This means that I'd be paying no interest on a mortgage, and no taxes either. Seems too good to be true!

My question for you guys: should I walk down this road? If I were to do this, I'd want to pay half of what I'm saving per month (about $3200) to my Dad, and save the rest into Index Funds.

Is that a good idea? Or would I be better off turning down my dad's offer and going 100% index funds? What do you guys think? Anybody have any experience with this choice?

secondcor521

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Re: Big offer from the Father....
« Reply #1 on: November 19, 2012, 11:04:24 PM »
I wouldn't do it.

Why not?

1.  I avoid mixing family and finances as a general rule.
2.  I don't believe that with 6 properties he's never had a tenant problem, assuming he has owned them for more than a few years.  Which makes me think maybe he's not being straight up with you.
3.  What you're saying about putting your name on the lease doesn't make sense.
     a.  You can't be on the lease as the lessor, because it's not your property.
     b.  You can't be on the lease as the lessee, because then you wouldn't have any income from your tenants.
     c.  He could put you on the deed, but why would he do that?  The only possible reasons I can think of are asset shielding or estate planning, and this approach is a bad way to do either of them.  If he buys a house and then puts it in your name, he'd owe a bunch of gift tax unless he uses his unified estate tax credit.
4.  There's no written agreement between you and your father.  If misunderstandings or problems arise, and they very well could, you could damage your relationship with him as well as other family members (Mom, siblings, etc.)  A few examples:
     a.  What happens if you do have tenant problems?  Who handles it?
     b.  Who pays the property taxes and HOA dues?  You?  Him?  (I doubt you can make the tenants pay these items directly.)  What if they don't get paid?
     c.  What happens with an extended vacancy?  Are you going to continue to pay him even with it empty?  What if you lose your job around the same time?

brickholz

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Re: Big offer from the Father....
« Reply #2 on: November 19, 2012, 11:15:13 PM »
Very sound advice. I'm definitely leaning toward rejecting the offer. Possible dangers to the relationship notwithstanding, I'm also a little worried about the legality of it all. So "putting my name of the lease" is not a sensible thing, huh?

Honestly this makes me wonder if he knows what he's doing. I think he's trying to be generous with me but hasn't thought the complications through.

Anyway though I appreciate your input. That sounds like the mature thing to do.

NWstubble

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Re: Big offer from the Father....
« Reply #3 on: November 19, 2012, 11:43:50 PM »
I think secondcor521 makes some good points, but if I were in your shoes I would not walk away blindly. What you are being offered is essentially a business opportunity (albeit complicated with family relationship), so I would treat it as such. If you are interested in getting into rentals, pretend it is not your Dad but rather an associate and fully vet the offer/idea before turning it down. As you said, he may just be trying to be generous, but you could work out a legal deal that allows him to feel generous by helping you get into the rental business instead of walking away without fully vetting the opportunity or his motivation.
"...if one advances confidently in the direction of his dreams, and endeavours to live the life which he has imagined, he will meet with a success unexpected in common hours."
- Henry David Thoreau

KingCoin

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Re: Big offer from the Father....
« Reply #4 on: November 20, 2012, 08:49:13 AM »
Why not simply buy the property yourself with a low interest loan from your father? You'll still have the family connection, but this dramatically simplifies the arrangement and leaves everyone's role in the transaction unambiguous.

Needless to say, any financial transaction involving 10s or 100s of thousands of dollars needs to be clearly documented, with all scenarios and eventualities outlined. Given the unorthodox nature of the proposed arrangement, the document should be reviewed by a lawyer and an accountant for both legality and tax implications. Let's say that over time you've bought all the equity in the house. Is your dad just going to change the name on the deed? Is this going to cause a huge tax liability? Obviously these things need to be thought through.

I suspect that your father is only trying to do you a solid here, but these under-the-table agreements can turn sour quickly when things don't go as planned.

DoubleDown

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Re: Big offer from the Father....
« Reply #5 on: November 20, 2012, 09:03:52 AM »
I don't think we understand the offer from your father, as presented here. What exactly is he offering to you? You've said he wants to put your name "on the lease," but do you really mean he intends to have you as a tenant/renter???

Or perhaps you meant to say he intends to add your name to the deed, as a co-owner? That's a fairly common thing for family members to do as a way to protect assets from estate taxes and for ease of transfer after death, so that the property does not have to go through probate, and the property would automatically transfer to sole ownership by you. There's no risk to you in that (but there is risk to him if you became a flake, for example).

Is this what he means? What do you mean about "paying him under the table"? Paying him for what? Some more specifics would shed a great deal of light on what this offer is all about. It might also be a good idea to have a more detailed talk with your father about what this offer is all about.

Angelfishtitan

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Re: Big offer from the Father....
« Reply #6 on: November 20, 2012, 09:25:02 AM »
Although you could look at this as solely a business opportunity as NWstubble says above you cannot completely ignore the fact that it is your father. Treating him solely as a business partner is going to lead to strain in your relationship if anything goes poorly.

If you still want to treat it solely as a business relationship you need more info. For example is that $1200/mo net or gross? What are your HOA fess? No tenants calling you, but what is the turnover rate and what repairs were needed when they left? Having tenants that don't complain is good, having tenants that don't tell you when pipes are leaking are just as bad though.

I am not sure where you live, but I am assuming quite a bit from Omaha. As a first time landlord, I am not sure that I would start with a long distance property.

This seems somewhat as your father trying to get you involved with what may be your empire in the future. Do you possibly want to own a bunch of properties in Omaha in the future? Was being a landlord ever in your plan to begin with? Just because your father is financing you doesn't mean you should do something you didn't want to otherwise. And if so I still believe a closer rental to start gaining experience on is a better choice for beginning.

totoro

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Re: Big offer from the Father....
« Reply #7 on: November 20, 2012, 09:59:45 AM »
I agree that we don't understand the deal - but it might be a fabulous opportunity.

Is your father putting your name on the lease and then you pay him under the table so he can claim a loss on the property?  I'm not sure of the logic behind this - but it is not above board if this is the case.  Is it lease to own?  How do you get the ownership interest?

If this is really a no interest mortgage and someone will be renting from you at a profit it might be a great way to get a start.  You need more details and a financial overview as well as knowledge of any tax avoidance issues.

brickholz

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Re: Big offer from the Father....
« Reply #8 on: November 20, 2012, 05:46:21 PM »
UPDATE.

So my dad told me he wanted to put my name on the deed. And I turned him down.

I think what some of you have said about mixing family and money is spot on -- I think it would endanger my relationship with my father, and that's not worth it to me.

I also have a bit of debt that I'm trying to work down right now, and taking on ~$130K in ADDITIONAL debt doesn't seem like a smart move.

Thanks for your advice, guys! I think I made the right decision, here. I'm better off saying no this time, and maybe proposing this plan again 4 or 5 years down the road.

DoubleDown

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Re: Big offer from the Father....
« Reply #9 on: November 21, 2012, 08:34:52 AM »
To be clear, having your name on the deed costs you nothing and is virtually no risk to you. Your father is likely giving you a great gift with very little risk to you, that you might have unwittingly turned down (and possibly even hurt his feelings in the process). You can be on the deed to the property (meaning, you are the sole owner, or co-owner with him) without being on the loan. That means you get to own the property, but have no financial liability for it (other than paying annual or semi-annual property taxes on it). So if he's simply talking about adding you to the deed, or even titling it solely in your name, while he pays for it, this is a great opportunity for you! I hope you will reconsider.

Now, if he's asking you to be responsible on the mortgage as well (i.e., a signatory on a loan), that's a different story. But that's not what you've said so far.

Like I said, it would not be unusual for a father to want to add a child to a property deed so that it can transfer immediately to him/her upon his death without taxation and without going through probate. So I hope you will investigate further and let him know you probably did not understand what he is suggesting.

totoro

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Re: Big offer from the Father....
« Reply #10 on: November 21, 2012, 09:29:01 AM »
I agree with DoubleDOwn.  You have not provided enough information to analyze the deal and I suspect that may be because you don't have this information.  You could be passing up a great opportunity. 

Doing business with family/friends can be trouble, but it is not always and it is one of the most fantastic and underutilized ways to accumulate wealth.  When I say underutilized I mean in the US and Canada.  Many other countries have this type of assistance as a cultural norm.  In the US and Canada having everything spelled out in writing can create comfort.  I personally co-own a couple of recreational properties with my best friend.  It has been nothing but an advantage to have our families share the financial costs and for our kids to spend the time there together.

Don't throw the baby away with the bathwater. 

brickholz

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Re: Big offer from the Father....
« Reply #11 on: November 21, 2012, 03:33:03 PM »
Hey guys, these are good cautionary words. I agree that doing business with family doesn't have to be awful. And you've convinced me that it's a great way for me to build wealth.

Just not right now.

I declined my father not so much because his offer was bad, but because it came at a bad time for me.

I'm not at the "wealth-building" phase yet -- I need to take care of a fair amount of debt (mostly student loans) first. Not only that, but I plan to acquire a little MORE debt when I got to grad school in a few years.

It seemed unconscionable for me to accept my dad's offer, knowing that I will have at least 2 years (during grad school) when I'll be heavily saddled with debt, and making almost no money. It sounded like a recipe for frustration, because I wouldn't be able to pay my dad a fair amount for what he's doing for me.

So I declined, but I asked him to keep the idea in mind for 4 or 5 years down the road. I'll be ready then, debt free and drawing a nice salary.

Thanks again for the advice you guys. It was very helpful!

AdrianM

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Re: Big offer from the Father....
« Reply #12 on: November 21, 2012, 04:08:28 PM »

So I declined, but I asked him to keep the idea in mind for 4 or 5 years down the road. I'll be ready then, debt free and drawing a nice salary.


This is what i wanted to see. You explain your position to your father, Thank him for his kind offer and ask him to keep it in mind for a few years later when your financial situation will have changed.

Well played.
In Australia mortgage rates are 6% and variable, No bank does 30yr fixed and your home is not deductable.