Thanks for the interesting replies.
Let me try again, because I think it is pretty straightforward. I'll even use some simplified nominal numbers as placeholders to make it more concrete. Remember, my goal is not to buy her house. My goal is to buy an interest in a property that produces income.
Suppose I purchase her property for 600000. For simplicity, let's say it is 90% LTV at 4.125% annual rate fixed for 30 years. I hold a mortgage that has a balance of $540,000 with monthly payments of $2617.11. Since the property was acquired via this mortgage, the interest on this loan is tax deductible.
Now, we go forward to purchase an income producing property. Remember that she already manages about 50 units and has extensive understanding of the rental laws and procedures and also has contacts with maintenance folks. By adding me to the mix, we have another person to manage and respond to the needs of the property as well as another interested party in studying the laws, contracts, interested tenants, etc.
Suppose the purchase price is 1,500,000. The 600,000 in liquidity produced by the home purchase provides a healthy down payment. The balance (900,000) is financed at 4.25% for 30 years, resulting in monthly payments of $4,427.46.
Let's say the income property can be expected to produce $85,000 net of expenses (maintenance, property tax, vacancy) annually. Not a slam dunk, but not bad for the area.
Now, the annual payments for the two loans comes to $31,405.30 and $53,129.51 for a total of $84,534.81.
In this case, the entire transaction (financing the house, financing the income property, collecting rents, paying expenses) is roughly cash flow neutral.
However, in year one, the total interest payment on the mortgage loan come to $22,100.39, reducing our tax burden by roughly 28% of that ($6188). This benefit only happens because of the effort put into structuring in an acquisition loan that is deductible.
Hence, the "cash" on cash return here is 6188/60000= 10.3%
There are other details here, as this structure would show rental income that would be subject to tax. However, the depreciation deduction would more than wipe that out (1/27 of 1,500,000 is $55,555), producing another tax benefit and more gain on the cash investment.
Granted, I think assigning ownership here is complex, because I'm assuming that I alone would pour in the $60,000 in the beginning that gets this rolling, but she would be putting her home at risk in the process, and I would be attaching myself to a home mortgage. But, we've essentially added a property to the portfolio that returns 10.3% on cash in the first year. In thirty years, we would hope that the property is cranking out at least $85K per year in rents with no more financing costs, and the original home will also have been paid for and we are still happily living there.
Thoughts?