Structuring a real estate investment with family member

[Zee]

I am considering assisting in the purchase of a condo with my sister.  I likely would be the primary provider of the down payment while my sister would live in the condo and I foresee her has servicing the mortgage and HOA dues.  Do you have advice on how best to structure such a transaction?  I’d like her to benefit from home ownership and I’d feel as if I would be taking advantage of her if she wasn’t building equity.  At the same time, I would want to earn some cash flow from my investment.

Potential options/issues:
•   Form an LLC where we each had a % ownership based upon down payment and initial equity.  She would be the lessee.  How then would we enable her to grow her share of equity?
•   Agreement that at time of sale, we each are paid out to what we paid in via down payment or principle and then split the remainder.  Issue is that I would not see any cash flow in the interim and timing of sale is unknown.

I’m sure I am missing may more options.  I’d love to get thoughts or if there are other scenarios that have worked for you.

Thank you.

[lr]

Can you just make her a regular old loan for the downpayment, maybe involving the house as some kind of collateral?

[KingCoin]

Can you just make her a regular old loan for the downpayment, maybe involving the house as some kind of collateral?

+1 (though collateral issues can be tricky. the bank will insist on being first in line.)

If you're just looking to do your sister a favor and make a little money too, a simple loan is by far the least complicated option. You can choose a interest rate and amortization schedule that makes you both happy. Another good option? You buy the property yourself, and then lease it to her with an option to purchase. This gives her a sense of ownership responsibility, without any complicated equity scheme.

Owning a fraction of your sister's condo can introduce tons of complications both foreseen and unforeseen. For instance, let's say she wants to do a $30k renovation. Do you have to eat a pro-rata piece of that too?

Needless to say, if there's a chance this causes a rift between you two, you should avoid getting involved. You should be willing to write your investment down to 0 and not sweat it too much.

[Zee]

I appreciate the additional suggestions of either a loan or lease/option.  I have some soul searching to do...  :-)

[Use it up, wear it out...]

DON'T DO IT. getting into business, especially real estate, with friends/family can be devastating, as the decisions you make in each arena (family vs business) are based on entirely different sets of expectations.

[AlexK]

Unless you are willing to forgive the debt or foreclose on her if she stops paying,  don't do it. If the banks think she is not a good credit risk why should you?

[Kazimieras]

Unless you are willing to forgive the debt or foreclose on her if she stops paying,  don't do it. If the banks think she is not a good credit risk why should you?

+1
Family is awesome and I know I would put my financial neck out for my sister, but I also know that it is money that may not be repaid.

[Zee]

The additional posts and suggestions have certainly opened my eyes.  I thank you for that.  Initially I thought it would be good to diversify my portfolio while assisting my sister in stepping out on her own.  She is now gainfully employed as a nurse.  While not at the point of shopping for a condo, she is interested.  I've been "coaching" her on getting her financial house in order - paying off credit cards and remainder of car loan, establishing a budget and monitoring monthly cash flow.  From there, the intent was to determine what she could comfortably afford while not setting herself up to be house-poor.  While I believe she will be able to qualify for a mortgage loan on her own when the time comes (student loans do remain, however), the initial thought was to co-invest to diversify my portfolio and take advantage of the market prices.  However, the risks that everyone has so kindly highlighted trump the diversification and portfolio enhancement real estate would make at this point (at least for me and in this scenario). 

I guess I value having a sister more than a lower mortgage rate and payment for her....  I hope she feels the same!