Buying a house for my parents and sibling: brilliant or stupid?

October 4, 2008 11:25 PM

Is it stupid to invest in real estate in the next year (knowing things are hitting bottom and buying a foreclosure)? Is it doubly stupid to intertwine family with it (they'd live in it rent-free until the market rebounds)? Is this the stupidest idea ever or brilliant?

Things are going really well for me. I'm maxing out my retirement, my marriage and immediate family are great, my house is half paid-off in just a handful of years, and I'm still getting paid really well. I could easily pay a few grand in mortgage on an investment property each month without affecting my budget too badly.

I know 2009 is going to be bad, foreclosures are everywhere, and the auctions/sales of homes are going for rock bottom prices, especially in formerly boomtowns most inflated by the bubble. I'm thinking of picking up a duplex in Southern California if I can get one "cheap" ($300-500k range is what I'd consider really cheap for down there in a decent neighborhood).

My family has hit rough times -- parents live in a retirement mobile home park in a 50 year old dark and dingy trailer. My only sibling is a lifetime renter with a small family and he works in the banking industry and isn't going to be able to afford a home anytime soon.

My plan was buy a duplex near where both families live, let them each live in half of it for the next 5-10 years rent free. This would be the ultimate gift for both families. My parents are old, and it may be the last house they live in, and if my sibling could skip rent, I think could afford a house in a few years. At some point, I could sell long after this burst bubble rebounds back and make a few bucks along the way.

It seems perfect, but the combination of bad financial times, family, plus all their baggage with me doing well while they aren't seems like a perfect recipe for disaster too.

Is this a stupid idea or could it work?

posted by anonymous to work & money (20 comments total)

Sounds like a wonderful idea as long as you can afford the mortgage on your own (e.g. if you're letting your family members live there rent-free, you won't be making any income from the investment in the foreseeable future). As you stated, you'll eventually be able to sell (and/or rent to other tenants) in the long run, so in that case it's a good investment.
posted by amyms at 11:32 PM on October 4, 2008

You might want to consider having them pay some rent, just for their own self-respect... make it less than they are paying now, and perhaps even put it aside in an interest bearing savings account for them that you will – surprise – give back to them as a downpayment for a house / some other big ticket item... (I guess this comment is more directed towards the sibling situation than the parent one. Your parents gave you housing for years and years, it's nice to return that favor if you have the means.)

You'll also have to figure out for yourself your rules of behavior and expectations and make them clear to your family. What if something breaks? What if they are negligent? Who pays the utilities? Who maintains the yard? Etc. Just to have all bases covered so you don't have disagreements in the future.

As long as you can be sure you have all these potential problems out in the open, and you truly can afford it (and will be able to afford it, you don't want to have to evict your family!)... then I don't see a problem really.
posted by visual mechanic at 12:02 AM on October 5, 2008 [2 favorites has favorites]

Keep in mind you are going to also be paying taxes on the place as well as maintenance and upkeep costs. Dealing with family living in a house is certainly a wonderful and generous gift, but mixing business with family has been known to come with its own set of difficulties. For instance, what if they break something expensive and important? What if the house needs a new roof or major foundation work? What if they cannot keep the house in good condition? What if you lose your job next year? What if, in 5 or 10 years time, your sibling ended up losing his job too and is no position to move out, let alone buy his own house? What if your parents are in the same situation? There are these and many, many other possible scenarios to consider. Being a first time landlord is difficult for anyone, when the tenants are your own family expect to open a whole new can of worms.

It doesn't seem out of line to request at least a token amount for rent in this situation. A few hundred dollars a month, to defray incidentals which might arise. Nobody likes to feel helpless, impotent, condescended to or even to admit that they need a hand. I would broach this matter to your family not as a charity, but as a situation which would benefit everyone. Them being able to pay you something keeps it somewhat even, retain their dignity, and you get the benefit of knowing that the people in your new house are trustworthy and will take care of the place.

I would strongly advise, at the very least, drawing up some type of formal document with the help of a lawyer that outlines any possible considerations which may arise. This may seem slightly awkward, but when your family considers the fact that they are staying rent free, or rent cheap, in a much nicer house than they would have been otherwise, I'm sure they won't have too much trouble signing on. This will serve not only as the measure of last resort in the case it really hits the fan, but also just to lay the groundrules and any expectations you might have of reasonable behavior guidelines family members would be expected to adhere to.
posted by sophist at 12:04 AM on October 5, 2008

In five-ten years, will you really feel comfortable kicking them out or charging them rent if you can't afford it? If you involve family, this is no longer a business deal, so assume that "the next 5-10 years rent free" is really "the rest of their lives rent free" and see if you're willing to shell out the cash. That, plus if things turn around for your sibling and he can afford a house but he continues to mooch, how's that going to play out (especially if you're not able to make a mortgage payment and he just bought a shiny new car?)

Still, I understand the desire to help, and perhaps there's a middle ground: buy a three-unit or four-unit building, and put your parents in there, rent free. Use the rent from the other units to pay towards/for your mortgage, or even make a profit (ideally you should be going in with this as a profit-generating business, even if you end up not achieving it, to keep yourself from overpaying.)

If the neighborhood turns up, perhaps you'll end up using the profits to buy another building, and you can put your sibling there; if it turns down, you'll have bigger problems to worry about anyway. Meanwhile, there's nothing wrong with being a lifetime renter; my mother-in-law has been in the same New York apartment since 1974, and even though she could pay cash for a house in our neighborhood without blinking, nothing would convince her to do so.
posted by davejay at 12:08 AM on October 5, 2008 [1 favorite has favorites]

Where in Socal?

While I am the world's biggest housing bear in general I think your plan is very workable. Housing in many areas has been chopped off at the knees already and it's debatable how much is left to fall, especially with respect to income properties in desirable areas.

The main concern I have would be the prospects of the neighborhood over the next 10 years. If for some reason it depopulates or (worse) becomes Mad Max-like then buying into it would be a mistake.

I am waiting on continued depreciation before buying but it needs to be said and understood that this Congress and the next administration can easily change the rules in a blink that will instantly reverse any lingering downtrends.

Simple things like altering the tax treatment of houses, massive first-time buyer subsidies, etc. Since we are perhaps halfway through the price declines, we are in a very unstable zone where prices may go down another 20% or shoot back up 20% due to political intervention(s).

If I were you I'd alter the rent-free aspect and go for some token rent.

$400/mo can support $100K in property value, meaning $800 from two tenants can buy a ~$200K nicer place.
posted by troy at 12:09 AM on October 5, 2008 [1 favorite has favorites]

Er, make that In five-ten years, will you really feel comfortable kicking them out or charging them rent if you they can't afford it?
posted by davejay at 12:09 AM on October 5, 2008

The bottom line is if you're in it for the (relatively) long haul, and you can afford to do it, there's nothing wrong with doing so. Real estate always goes up, long term, except in truly exceptional circumstances like say in Galveston, where some lots simply don't exist above sea level anymore after the hurricane.

Where a lot of people have gotten into trouble with real estate has been on the affordability side, the primary factor in almost all of the foreclosures we're seeing. Break it down like this:

If the following is very true:

- You can afford the mortgage payments without straining yourself, and could in the future afford them if your interest rate on your mortgage were to (worst case scenario) double during a refinance (happened in Vancouver, friend of mine had to pay 14% for a couple years till things settled down)
- Your tenants won't cause horrific damage to the property (unlikely since you're related and will be able to find them in future)
- You WON'T do something stupid like take out a HELOC on the property the moment its value shoots up 10% to go buy a Hummer or something

Then I would say go right ahead. What you may want to do though is get your family to kick in a small amount as rent, not a lot, just a couple hundred a month, and then you put that money into a term investment or a high interest savings account. Keep it as an emergency fund for the property to cover repairs, or if something bad does happen to your financial situation for a brief time it'll be a good contingency fund. Then when you're done with the family living in there and it's time to sell, you can pull out what's left in the fund as a surprise gift to help your family move in to their next place.
posted by barc0001 at 12:10 AM on October 5, 2008

One last thing, about buying a house in a turned-down market that's still going down: be sure to do it in a stable area rather than a sketchy one (like in a bad neighborhood, or one that's been depopulating, or one that relies on a single manufacturer for the majority of employment.) Be sure to go into it expecting the trend to continue for a while, too, so if it's for living in you had better really like it (don't plan to move to a better school district in three years, for instance) and if it's for a business investment you'd better be sure you can turn a profit each year even with occasional vacancies (because if you're operating at a loss, in the short term you'll likely be stuck choosing between living with the loss each month or selling the building at a loss.)

And yet, despite my doom-and-gloom above, I'm looking to do something similar myself as we speak. :)
posted by davejay at 12:14 AM on October 5, 2008

An economy that is a disaster for some is an opportunity for others. That's how it works.

Davejay has a good idea about the multi-unit apartment building. One major benefit is that it could still work if you lost your job. (That is always a consideration.) A family member could be designated as manager of the building in exchange for no or low rent.

(I would bet that Davejay's mother is still paying the rent she paid in 1974.)
posted by yclipse at 2:52 AM on October 5, 2008

So, in five years, what happens? Your parents and siblings go... where? Do they suddenly have more $$ in five years? Will there suddenly be many more housing options to choose from?

This is going to sound glib, but why not use your extra cash, and research time, to find and support some kind of systemic relief effort, either in your geographic area or maybe an institution that's researching smart ways to make living better (i.e. resolving the financial crisis, looking for ways to improve education, etc.) for everyone. Your family's lives will be better, much better, if the financial situation in general is easier for everyone.

And you'll be less vulnerable to the kind of unpleasantness that only good fortune can bring.
posted by amtho at 4:31 AM on October 5, 2008

Supporting your parents is noble, but they could as easily be ensconced in a rental.

Anyone who bought a house in the late 1920's had to wait until the early 1950's -- 25 YEARS -- before the value of the home returned to its original level. And that does not include the time value of the money.

This credit crisis is far, far from over, and has the potential to be more virulent and more protacted than the Great Depression.

If you're paying cash, and don't mind that the value of your house might decline for a decade or two -- even from these levels -- and are just looking to support your family, that's a different proposition, but if you are looking to make an investment, we are far away from the "bottoming" you think we've hit.
posted by adamrobinson at 5:13 AM on October 5, 2008

I would think that renting to family would be tough. Your general idea is noble, and might still work, but how exactly would the kicking-out process go? "Oh hey, it's been ten years, see ya!" is not really a great idea.

You should also think about whether your parents WANT to move. My grandparents used to live in a pretty sketchy area but were adamant about not moving out of the home they'd had for years and years.

Also, I know you want to help your bother, but how would you feel if he took the money that you want him to set aside for a house and took a big vacation? Or bought a new car? Would you resent him if he spent that money on frivolous things instead of necessities?

Just some things I think you should work out before you embark on this project.
posted by christinetheslp at 6:01 AM on October 5, 2008

Provided you do eventually decide to do this:

Consider asking your sib to pay rent, even if it's nominal, if only to allow them to show that they've had a five-year history of rent payment at their address. I'd consult an accountant on this, if not an attorney.
posted by Emperor SnooKloze at 7:06 AM on October 5, 2008

I think it's a noble idea, but my first hesitation is that your own mortgage isn't paid off, what happens if the most unfortunate of situations occurs to your family? Will three families be out on the street as a result? Why not pay it down first if things really are so good for you. My second hesitation is the "rent free" idea for the first ten years. Although its somewhat understandable for your parents, it might make your family feel like charity cases, and they may feel subject to your every whim since they will be indebted to you. Then there's the shock five to ten years down the road when they have to start paying rent again.

If you do but the house, why not rent out both sides to your family, but at a deeply discounted rate. Urge them (but don't force) to put the difference into savings or payment of outstanding debt, and gradually increase the rent each year with the plan being that they are paying the going rate in 10-15 years time. Once the house is paid for offer to see it to them for the difference of what they paid in rent, or some other amenable agreement that shows respect for both sides, or leave the house to one of the families in your will.
posted by furtive at 7:09 AM on October 5, 2008

s/but/buy
posted by furtive at 7:10 AM on October 5, 2008

Real estate always goes up, long term

Many houses bought in 1988 in Japan are still under water -- the YOY DECLINES only stopped in 2005.

I'm 41 now and it wouldn't surprise me if home prices do not get back to 2005 levels IN REAL TERMS in the next 20 years.

This is because what drove prices up 2003-2006 was essentially suicide lending practices (shit, literally, just ask LEH, WM, WB, CFC, ML, BSC) that we may never see again in our lifetimes.

Real Estate "always goes up" to the capacity that we can PAY for it. Should taxes, health care, education, energy costs, manufactured imports, etc etc continue to go up, and wages remain stagnant, Real Estate will CONTINUE TO GO DOWN to adjust, since ground rents are the hidden shock absorbers of the economy. In good times they skyrocket, and in bad they disappear.
posted by troy at 8:04 AM on October 5, 2008 [1 favorite has favorites]

/s/ NOMINAL for REAL above.
posted by troy at 8:07 AM on October 5, 2008

I'd just watch out for the assumptions you're making. Does everyone want to live in SoCal? Does your sibling want to live with your parents? Does s/he want to save enough for a downpayment? Will you feel resentful if they're not grateful? Will you feel judgmental if your sibling spends the rent savings on restaurants and baby toys?
posted by salvia at 11:39 AM on October 5, 2008

Work out the specific details, and try to figure out where your assumptions are.

- Bubble rebounds: You don't know if and when it will happen. What happens if it rebounds in a month -- will you kick your family out? What if it goes down to $100k and stays there for 30 years?

- Investment property: this is tied to the first point. Typically, what makes the property an investment is that you collect rent to almost/completely cover your expenses and experience some appreciation. In this case, you're giving the rent away as a gift.

- Expenses: you know what the expenses of owning a house is, and the mortgage isn't the only one. Also, if it isn't your primary residence (but is held in your name), you may not get favorable tax treatment. And if you hold it in your relatives' name, that's a whole another can of worms.

- For your brother -- if you really want him to buy a home, how about formalizing saving for a down payment as 'rent' that either you collect and hold for the down payment, or he holds in a separate account? Like make it clear that this isn't an optional 'it would be nice if' but a condition for you to be helping him.
posted by bsdfish at 6:15 PM on October 5, 2008

Sounds like a good idea to me. If you're really not charging rent on it you may be able to tax-deduct the mortgage interest on it as a 'second home', which generally makes this into a better investment than you could get elsewhere.

Mind you time the market - no one thinks we've bottomed yet, let some of the pent-up supply lose their jobs - and don't buy into a distressed (i.e., 50% vacant) neighborhood. A realtor can help you with these issues.
posted by ikkyu2 at 11:01 PM on October 5, 2008