Author Topic: Purchasing "second home" as investment property?  (Read 2163 times)

reepstache

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Purchasing "second home" as investment property?
« on: January 02, 2014, 12:27:14 PM »
I'm a long time reader, first time poster. This post is going to be part about real estate investments and part about family, so I apologize if it gets complicated.

Background info:

My dad has made a number of poor decisions in his younger years that left him financially destitute after a nasty divorce with my mom. He's cleaned up his act in the last decade and now lives a very simple, frugal, and healthy lifestyle. However, he doesn't make very much money. He works primarily as a full-time ski instructor and draws his social security. He got into the real estate market in our area right when the market crashed in '08; he sold his first property this fall. He's in pretty poor financial shape in terms of the long-term outlook of retirement (he withdrew a loan from his 401k after the divorce, he's borrowed small amounts of money from people--but was able to pay them back after the sale of the property) although his monthly expenses are more or less covered and he has a little bit in savings.

He's in very good shape for his age (63), but long-term there's some concern about Alzheimers in the family as well as the fact that he likely can't be a full-time ski instructor forever. It is a very physically demanding job.

My sister and I are both in our early 20's and have begun thinking about the long-term picture of caring for our parents (mom is also 63). Our mom is pretty much set for life--she inherited a substantial amount of money from her parents, was already smart with her money, has retired, and probably won't need any financial assistance from us.

We can foresee our father being a real concern, however, and we would like to act proactively in order to ensure that he doesn't have to work until he drops dead, that he isn't worried about having somewhere to live (he rents at $550/month for a 1 bedroom as of now), and that we can financially and medically support him if he needs it down the line. If it came to providing physical instead of financial support, my sister would likely take on that responsibility of providing care.

How all of this info relates to real estate:

I would like to purchase a 2 bedroom single family home or a 2 bedroom condo within the next year. My father would live in part of the unit and would serve as the property manager--he would make arrangements for a second (or potentially third if it was a 3 bedroom) tenant, handle repairs and maintenance out of an account set aside from rent money. There are properties available here for around $200,000. Ideally, I would like to spend less than this and believe I will be able to. I am capable of putting a 20% down-payment on this home all by myself, but it would mean liquidating a significant portion of my investment portfolio. I have spoken with a local lender and I will most likely be able to qualify for a mortgage after March of 2014 (I begin military service in March, I am not able to use the VA loan for this property, and yes, this does mean I would be an absentee landlord).

Wrinkles and questions:

The lender is thinking about applying for a mortgage as if this were a second home. I do not have a primary residence. How would this work? I trust that this lender knows what she is talking about--she is very highly recommended and does a ton of local business, but I'm not clear on the details of doing a mortgage this way. Does anyone have any experience with this kind of mortgage?

There is a possibility that my father and sister would be able to contribute to the down-payment, however, it's doubtful that it would be beneficial for my sister to be listed on the mortgage. It's possible that my father would be able to be listed on the mortgage without causing a significant increase in the interest rate, but I am not totally sure about that at this time. I do not particularly want full responsibility for the mortgage when other individuals aren't listed there, but are still considered to be partial owners on the property. Is there a way for me to be the sole mortgage holder and owner, while still providing some kind of financial benefit to my sister? In other words, while legally her contribution to the mortgage would be considered a "gift" to me, I would like to legally establish that she is due some portion of the rental income and future value of the house if I sell it (I just don't want her to be legally an owner of the property).  Alternatively, how could I legally establish up-front that at some point down the line I might want to buy her share of the property (if she was listed as a partial owner)? If my father were listed as an owner of the property, he would will his equity to my sister and I, so that is less of a concern.

Ideally, I would like for this property to serve as a value-added part of my portfolio. It would be nice to make enough in this venture to pay down the mortgage in less than 30 years--because I foresee a time relatively soon when my father may not be able to pay rent. My father makes a very good tenant, is reasonably handy around the house, and would be more than capable of managing an additional tenant or two. My theory is that tenants staying in the home would be more likely to behave themselves if the "landlord" also lived there. That said, there's also a possibility that we would be able to rent this property out on a short-term vacation rental sort of deal for at least part of the year. This would of course mean considerably more work--and it's likely going to be up to my father and how much he feels he can handle--but there is a potential there for a higher ROI, especially if we can keep costs down in the maintenance and management areas.

I am trying to make a decision here that makes financial and personal sense for my father, sister, and I. I want to make sure at the other end of this purchase, as well as down the line if there are any issues with the property, tenants, etc, that we are all protected and can remain on good terms with each-other. Which property I buy, whether I get a great deal on it, etc, are of less concern to me. I would be able to tolerate a situation where I a) didn't need to liquidate substantial investments to cover the down payment (so dad and sister help out some), b) everyone was legally protected from any weirdness that might happen with the property, and c) the rental income was sufficient to cover the mortgage, maintenance, and taxes--EVEN IF my father wasn't paying "full price" rent.

How can I best protect everyone legally during this process? What am I not considering? Is there a conflict of interest if my father represents me as my real estate agent? If all of this is a terrible idea, why, and what would be a better one? I am looking for input not just from folks who have a ton of real estate experience (although I would certainly welcome it), but also from people who have needed to consider the needs of aging parents or other similar situations and who have made accommodations for them.

Thank you all for your time and assistance.

KingCoin

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Re: Purchasing "second home" as investment property?
« Reply #1 on: January 02, 2014, 01:00:19 PM »
Honestly, this sounds like a very bad idea to me.

First, intertwining your personal finances with your family affairs is almost always best avoided if possible, even if everyone has good intentions.

Second, it's probably a bad investment. Consider: A $200,000 property should rent for around $2,000/mo. If your father is occupying half of it, it's costing you $1,000 mo (probably more, since the "roommate" will likely pay a discounted rent since he has to shack up with a baby boomer. So call it $1,200/mo). Do you expect your father to pay $1,000-$1,200 rent or do you plan to just eat the difference?  It's probably much more economical for you to buy a pure investment property and just pay his $550/mo rent than to pursue the more convoluted solution you proposed. Simply paying his rent also makes things easier to equitably and transparently split with a sibling.

If and when your father's health or finances deteriorate, I'd deal with those problems as they come up. There's little reason to saddle yourself with a money-losing "investment" property, especially when it's not clear what problems this property will solve.

Lans Holman

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Re: Purchasing "second home" as investment property?
« Reply #2 on: January 02, 2014, 01:32:45 PM »
Agree with KingCoin.  Maybe try to define a little more clearly what the problem is that you are trying to solve and how much you are willing to commit to that.  If your dad is doing OK where he is and only paying $550, have him stay there.  You're talking about tenants but if it's a single family house they would really be more like roommates, and why is anyone going to want to pay that much to live with a roommate in a city where you can get a 1br for $550? 
Maybe if you found a pure investment property that was senior-friendly (e.g. no stairs in case he has knee trouble) you could pay him to help you manage it? Then in the back of your mind have it as an option to give it to him in 10-20 years, maybe with your sister living with him.  That makes a lot more sense that committing to something now with all those different names on the mortgage, just to solve a problem that doesn't exist yet.
Is he actually a real estate agent?  Maybe he should look into that as a way to make some money before retirement without the physical strain.