Help me understand how to leverage a rental property to purchase another rental property.

October 16, 2008 12:21 AM

Help me understand how to leverage a rental property to purchase another rental property. Plus it involves family and money.

So, the situation is a more than a little complicated. I'll try to explain as best I can.

My family currently owns one rental property in the city I live in. It is a 3-flat, and all three units are being rented out. A family member currently resides in one of the units and is the building manager as well. He's been doing it for 20 years and in that time the property has turned into a great family asset. The units have almost always been full.

Three years ago, I was given a sum of money for the specific purpose of purchasing a property to live in. I did just that. Of course, I bought at what now seems to have been the top of the market (though it has still been relatively stable in my area, even now). I can no longer afford to own the property myself, and on top of that I'm looking to move out of state. I leveraged myself pretty hard to even be able to afford it in the first place, and it caught up with me. So early this year, my brother and I refurbished the condo (basic, refurbed some floors, turned a 1bed + den into a 2bed and refinished the bathroom). The unit has been on the market since June and not one buyer has made an offer, though we've had plenty of showings. But I need to have this off my hands. I'm too close to the mortgage principal amount to keep shaving down the asking price and still be able to pay the realtor. And on top of that, I seem to be trying to sell at a time when even the most qualified of buyers might not be able to buy a TV on credit, much less real estate. But if it sold in a private sale, I'd be able to walk away even and keep what I consider a valuable property within the family; something to continue generating income for our family years down the road.

I'd like to make a case for having the owner of the first building become the owner of this condo, and to rent it out. The owner of the building is now essentially a trust being managed within the family (of which I will ultimately become a beneficiary).

Are there tax benefits for doing this? Mortgage interest?

Assuming there is significant equity in the building to purchase the condo (it is theoretically worth about 3x what the condo is), is it best to use a mortgage? Or use the equity to purchase it outright?

I'm sure I already know the answer to this, but are there more questions I should be asking so I can be better informed when I enter into this discussion?

The unit is in a 30-unit complex, managed by a solid property management company. Though I'd be out of state, I have no doubt that between them and the first building's manager (who lives a mile away), we'd be responsible landlords for our tenants. And they allow units to be rented out.

This turned into a longer question than I'd intended, sorry..

posted by ninjew to work & money (3 comments total)

If I understand this correctly, you want to convince the trustees of the the family trust to buy your flat.
One problem I can foresee is that the other beneficiaries of the trust would lose money. You're asking them to above above the market price of the unit so that you can get your money back.

Are the trustees also the beneficiaries (I'm not sure if this is even legal in your jurisdiction), can you convince all the beneficiaries of the trust to sign off on this?
If it had been in the family for generations, then they might be easier to convince, but if it was my trust I wouldn't agree. Moreover, if I was an external trustee employed to look after the assets, I wouldn't agree either because of the future liability issues.

Also, if this transaction takes place at above market price, it likely won't be considered an arms-length transaction and may incur additional tax liability (because you're effectively transferring money out of the trust and to you)
posted by atrazine at 1:39 AM on October 16, 2008

atrazine brings up some good points about why this might not work.

What about taking a different tack: could you hire the manager of the trust units to manage your condo? This might work if rents are staying up while the credit markets depress prices. I see all sorts of problems arise from out-of-touch landlords, but with an ostensibly trustworthy property manager close by perhaps those issues could be mitigated.

Otherwise, selling any real estate this days is a tough nut.
posted by GPF at 6:17 AM on October 16, 2008

You could also offer a lease-option on your condo, instead of a straight sale. This might attract buyers that don't have the necessary down payment ready.

I doubt that even a family member would want to purchase your condo at an above-market price.

Purchasing the condo outright with the equity in the condo would be a bad idea. Investments should always be diversified, and the buyer would be putting all of his eggs in one basket. One large, shaky real estate basket.
posted by Ostara at 7:56 AM on October 16, 2008