Multigenerational housing: finances & feelings

[Off the Wheel]

Hi all,

Looking for advice on a hypothetical-but-becoming-realer situation.

My parents (mid-60s, healthy) recently bought a second property, and since then, they've been spending upwards of 60% of their time there. That means my childhood home in a VHCOL area is sitting empty. It's a 4-bedroom, 3-bathroom house currently valued at $2.4M. (Yes, I said VHCOL.)

My husband and I live in a 2-bedroom townhouse, valued at $799K. We also own a 1-bedroom apartment, valued at $499K. It's currently rented to a friend, and the rent covers all of our expenses plus a little bit extra.

We've been happy in our townhouse for the past few years, but now we are trying to get pregnant and thinking more seriously about what we'll need in the future. With that context, my parents have started floating the idea of converting their house into a two-units, so we'd have most and they'd have a pied a terre in the city.

This all sounds great in theory, but since it will mingle feelings (how to avoid the feeling of 'living under my parents' roof') and finances (I have a brother who is single and lives far away, but theoretically in the future he might 'deserve' half the house) I want to make sure I'm covering all my bases. Can you help me decide on the questions to ask?

Here is some of what I'm thinking:

• Legal/financial rights - who owns what? This is especially true if we give up our properties to cover some of the renos.
• Who is responsible for things like taxes, utilities, etc
• Time commitment - can we agree to 'try' this for 2 years? Need to make sure no one changes their mind after going through the time and money.
• Renovations - who's paying for what, and what are the rules about what can and can't be done
• Boundaries - need to be clear about the separate spaces being truly separate
• What do with my brother
• Look into whether I should sell my properties or keep them as back up

What else am I missing? Has anyone done something similar, and how did it work out?

[GizmoTX]

Do you WANT to live in that house? Do you want to sell your property to do it? Could you AirBnB the pied a terre when they aren't there?

The cleanest way is for you to buy it, & rent to your parents when they use their (smaller) part of the house. Or, convert the ownership to a family partnership, where you purchase your share according to the square footage of your unit & each party shares expenses pro rata. Either way involves a purchase, which avoids the gift/inheritance issue with your brother.

[mskyle]

Another way to do it would be to convert the house to condominiums, with your parents owning their unit and you owning the rest of the house (I'm not sure how different that is than GizmoTX's family partnership idea), but where I live there are lots of condo-converted duplexes that are operated as two-unit HOAs.

Regardless of how you do it, though, unless you pay fair market price for the house, your brother might reasonably feel like he has gotten screwed over. And make sure it's what you actually want!

[AMandM]

A question to ask yourself as well as your parents: how will you feel about making changes to this house?  Will it feel like a criticism of how your parents had arranged it?

[Off the Wheel]

All good points. It feels complicated because there's so many variables.

Do I love that house? Yes.
Would I choose to buy a house in this market in this city? No.
Am I stuck in this city for work? Sort of.
Do I want to stay in the same city as my parents in order for them to have time and support with their future grandbabies, and so I can help with elder care? Yes.

I think we would need to figure out some deal where we're 'renting' it from them (covering property tax, utilities, insurance) but they still own it (or still own most of it). We'd get my brother on board, and build in some stipulation that if my parents pass we can stay until the kids are out of school or until we decide to sell. And then we'd need to figure out how to account for the fact that we would most likely have to sell one of our places to cover the renovations we'd want to do and would potentially be 'out of the market' from there.

[Landslave]

Hi,
   Is there some other asset that your brother could inherit to make it equal for all?  And, in the meanwhile, can you pay your brother instead of your parents, half the added value of living in your parent's home so that he has no hardship or hurt feelings that you have a perque that he doesn't have? 
   My thinking is that the house is cheapest if it is not mortgaged and if it doesn't change hands with all the transactional costs of a $2.4M home.  It is kooky to do any of that when one or both of your parents are likely to live to see the grandbaby-to-come graduate high school, and leave for college, and for you then to be ready to live a great life in a LCOL locale instead of the VHCOL locale.

  I will point out, too, that living in $2.4M in equity is not smart if it isn't really needed as a residence by the family in the VHCOL place you need to be in.

  Let's say that you could move to an agreeable place and get a mansion for $600K which would house you and your parents happily, and more privately (a fancy in-laws suite).  You could sell or rent your apartment and townhouse, and sell the $2.4M house now, and derive an income stream.  If that new state you move to (Texas, Tenn, Florida) had no income tax, you might be so much better off that you could literally change the trajectory of the whole collective family finances, AND have a stream of $$ to greatly assist your parents when and if you need outside help giving care to them in their later senior years.  The income from your apartment and townhouse would pay the taxes on the new place, and pay for lawn maintenance, too.

  Most places in the country, $600,000 would buy more house than you vacuum without a 100 foot extension cord.

  Time for a big family pow wow.

[Villanelle]

All good points. It feels complicated because there's so many variables.

Do I love that house? Yes.
Would I choose to buy a house in this market in this city? No.
Am I stuck in this city for work? Sort of.
Do I want to stay in the same city as my parents in order for them to have time and support with their future grandbabies, and so I can help with elder care? Yes.

I think we would need to figure out some deal where we're 'renting' it from them (covering property tax, utilities, insurance) but they still own it (or still own most of it). We'd get my brother on board, and build in some stipulation that if my parents pass we can stay until the kids are out of school or until we decide to sell. And then we'd need to figure out how to account for the fact that we would most likely have to sell one of our places to cover the renovations we'd want to do and would potentially be 'out of the market' from there.

Depending on who pays for the renovations and other upkeep, I might not be okay with this set up in your shoes.  Also, if you are just renting from them, you lose any opportunity for appreciation, which may or may not be a concern bit sounds like it might be for you.  You'd also want to discuss rent increases and what that might look like.

The only way I'd be okay with a simple rent situation is if it really was treated like a rental.  The owners pay for any renovations, maintenance, upgrades (but this also means they decide what gets upgraded, when, and how) and any other expenses. 

I'd be more likely to consider buying out half of the property from them, funding half of all expenses, and getting your name on half the property (or as 50% owner).  When the time comes to inherit, you get the half you've already bought and you and your brother split the other half (IOW, you'd be 75% owner and him 25%, and if you choose to stay you either buy him out at 25% of FMV or you pay him 25% of fair market rent).