Condo situation - buy-out? then rent or sell?

[jeromedawg]

Hey guys,

I'm in a pretty 'unique' situation with the condo that we're in now. It's in a relatively HCOL area (Irvine, CA) and was built back in 89' or 90'. I went in on it with my parents back in 2007 and the down payment down and my parents did a 1031 and rolled over an existing investment property sale into this one, essentially paying it off in full. At the time, we got in when the market was going up and before the bubble burst... not great timing but that's what it came down to at the time. Anyway, I've been sending small 'mortgage/rent' payments to my dad on a monthly basis ever since we got it but they're wanting to sign the property over to us in full as part of an early inheritance.

We'll just use some static/rounded figures here.
Condo purchase price: $515k
My down payment: $15k
My monthly payments: $700

In reality, I own a pretty small percentage of the condo (along the lines of 15% at this point in time). On paper, I technically own 25% of it but in order to actually get there, I'd need to send my dad somewhere between $40k-50k or possibly a little more.

Here's the tricky part: I have two older brothers with whom my parents want to split the inheritance equally between my brothers and I. Since I already technically own 25%, they would take the remainder and split that three ways. Basically, if we ever decide to sell the place, they'd each get 25% and I'd get 50% (including the 25% I already own). I'm not quite sure how it would work if we end up renting the place out, but I figure we could argue taking most or all of it since we'd be the ones actively managing the place. So the money will just "sit" in the property until it's sold. I believe the details of the inheritance split are in my parents will.
Now, the most unusual part of this is that we've all "agreed" that if we find another place to live, we could sell and use the proceeds to fund the new place. But if we ever sell the new place in the future, we'd still have to pay out my brothers their 25% each of the inheritance. So the carried value of the condo and funds is "locked" in a sense (I suppose we could "buy them out" but I'm not sure how this would work since it's all in the family... and we wouldn't be able to buy them out right now unless I decide to fold my entire taxable investment portfolio lol)

Another possibility we may be facing is to have my in-laws move into the condo if we decide to move out and find another place to live. That's still up in the air but is a possibility that would result in us not being able to rent it out at face-value (my in-laws aren't in the best financial shape especially). Anyway, that's another topic to think about...

At this rate, is it better just to keep it as an investment property, rent it out, and figure out the split (if any) that my brothers would receive as rental income? I think there were some discussions around doing it this way, and we talked about how we should be able to net all the rental income especially if we are the ones managing it.

[jeromedawg]

If I decided to buy my parents share of the property out (so we flat out own the property 100% no strings attached), is it advisable to take a loan out to do that? And what would the loan amount be based on? Current value? Or value of the condo when it was purchased?

Is it better just to use all the money from my taxable investments (like $300k worth) to go towards the buyout? 

Our problem is that I don't think we want to live in the property long term but feel like it would be a pretty good unit to rent out at the same time.

[DaveR]

Are you going to send your dad $40-50k to get to the 25% on paper?

I'd say figure out exactly what you really own right now (less than 25%). Then divide the remainder 3 ways. Say you have 10% already, plus 1/3 of the remaining 90%... 40% for you, 30% for each brother.

From there, it's just a matter of dividing things up on a pro-rata basis. Sell it? 40/30/30 split. Rent it? 40/30/30 split of net profit (gross rent - taxes - HOA - management fees - maintenance - all other expenses). If you rent it and are the manager, pay yourself a management fee. If you have to pay a plumber to fix something, 40/30/30 split. If you really want to do it right, then create a LLC (partnership) and have everything flow through that...including all the tax benefits.

[jeromedawg]

Are you going to send your dad $40-50k to get to the 25% on paper?

I'd say figure out exactly what you really own right now (less than 25%). Then divide the remainder 3 ways. Say you have 10% already, plus 1/3 of the remaining 90%... 40% for you, 30% for each brother.

From there, it's just a matter of dividing things up on a pro-rata basis. Sell it? 40/30/30 split. Rent it? 40/30/30 split of net profit (gross rent - taxes - HOA - management fees - maintenance - all other expenses). If you rent it and are the manager, pay yourself a management fee. If you have to pay a plumber to fix something, 40/30/30 split. If you really want to do it right, then create a LLC (partnership) and have everything flow through that...including all the tax benefits.

We own about 15% currently (about $80k is paid into the property including down payment and the monthly payments I've been sending for the past 7-8 years). We're still debating on sending the $40k-50k in favor of a full buyout... The paperwork is in place. I think it's just us signing off and initiating things. I'm not sure if we want to be tied up in this kind of situation either way and would rather not have a 'leash' which is why I'm not contemplating a full buyout. For the full buyout, I'd likely need to take a loan for around $130k... I have about $311k tied up in taxable assets (ETFs, ESPP, Stocks and index funds) that I'd basically have to cash out on and transfer over.

I just don't like this whole co-ownership thing. Already, I can sense the tension with my brothers whenever the topic is brought up. And in particular one of my SILs who asks questions like "So if mom and dad actually split it differently and gave you the entire thing as an inheritance and giving us either money or other assets, as opposed to splitting this particular asset three ways, wouldn't that potentially be unfair if the condo skyrockets in value and you decide to sell it then?" - this is why I am sort of looking at a full buyout. Not because of the chance of that happening, but because I don't want us to be quarreling over how we think my parents should split their inheritance in the big picture. And I don't want any of us to feel like we're locked into something that we don't want to be if we don't all agree.

[Sibley]

To preserve family relationships you would probably be better off selling it now and splitting it between you and your parents. Let your parents decide how much the siblings get, if any. They aren't co-owners right now, so legally have no say.

As long as everyone knows that the parents are dividing up the money to the siblings, not you, they shouldn't be mad at you.

[jeromedawg]

To preserve family relationships you would probably be better off selling it now and splitting it between you and your parents. Let your parents decide how much the siblings get, if any. They aren't co-owners right now, so legally have no say.

As long as everyone knows that the parents are dividing up the money to the siblings, not you, they shouldn't be mad at you.

And that's what makes it so weird with it being an "investment" property because the money tied up in it will never be static. So if my parents gave it to us fully and we sold it later, there would likely be some jealousy about how we sold it at the peak or whatever and benefited greatly and how it's unfair to them (my brothers) blah blah blah.... my parents have two other properties up where my brothers are (Bay Area) so I don't see why they can't just split the investment properties themselves between the three of us and whatever other assets. Instead, my parents are insistent that every single one of their assets is split 1/3rd between all of us.

We currently live in the place so selling it now isn't really an immediate option. And even then, my parents have still marked it out as an asset for future inheritance to be split between all the brothers. So if we sold it now, the money would get all split up. And then we'd be in a situation where we have to find another place to live (which isn't too convenient with a 3mo old). That is, unless of course, I just buy them out plain and simple. It would be of great cost, and would pretty much diminish my FU-money stash (and force all my money into a "home investment" lol), which is the big drawback.

[Another Reader]

One major problem here is the 1031 exchange your parents made.  Eliminating tax consequences to them for any transaction involving this property is critical.  In your shoes, I would sit down with your parents and a CPA to structure a transaction that eliminates taxes for your folks, minimizes your taxes if you sell, and is fair to all the siblings.  There may already be tax consequences for the interest in the property you "bought" from them. 

I might look at selling your ownership interest to your parents and allowing them to rent the condo out or sell and re-invest.  Sort out the inheritance with a stepped up basis when they pass on.

[jeromedawg]

One major problem here is the 1031 exchange your parents made.  Eliminating tax consequences to them for any transaction involving this property is critical.  In your shoes, I would sit down with your parents and a CPA to structure a transaction that eliminates taxes for your folks, minimizes your taxes if you sell, and is fair to all the siblings.  There may already be tax consequences for the interest in the property you "bought" from them. 

I might look at selling your ownership interest to your parents and allowing them to rent the condo out or sell and re-invest.  Sort out the inheritance with a stepped up basis when they pass on.

Interesting, that might be a better option. That way we can continue just "renting" from them and when it comes time for them to dish out the inheritance it'll be clearer and a little more straightforward I guess.

I pitched the idea to my dad via email in continuation of an old thread we were on to discuss this. Will see what comes of it.

The more I think about it, with my wife planning to go SAHM, and figuring how expensive it is living in CA, the more I want to move to another state. This would especially work out in my favor and be extremely tempting to do if I ended up getting an offer for a 100% telecommute position that's on the horizon.