Rich Dad, Poor Dad: buying out a family home
June 19, 2007 3:19 PM Subscribe
Is investing in this house a good deal?
posted by anonymous to work & money (21 answers total)
My husband and I are both artists. Typically, our after-tax income is about $15-20K, combined. This is alright with us because we're doing what we want to be doing -- there isn't anything else we want to spend our money on. We have no debts and no children; we are both 34.
We live rent-free in a house co-owned by my husband's father (call him A) and uncle (call him B). A and B inherited this house from their father (C), but didn't need to use it as a residence because they have their own homes. Several years ago, my husband and I had moved in to take care of C in his old age, in exchange for rent-free living. C died last year. The house is currently worth approximately $1 million (4 bedrooms, 3 baths, finished basement, 2-car garage on a small property in an affluent suburb in the Northeast US).
A and B are currently proposing to us this deal: we begin making monthly payments at a reasonable interest rate (TBD) to B in order to purchase his half of the house ($500,000). After that's done (30 years?), we would co-own the house with A. We could then sell it and split the results with A. Or we could do nothing and wait for A to die, in which case we'd inherit half of his portion (my husband's brother would get the other half), thereby owning 3/4 of a house that was worth $1 mil in 2007.
Now, people at our income level don't normally invest in million-dollar houses, which is why I don't know if it's a wise investment for us. Is it? What would make it so? Is it only worth doing if we get an especially favorable interest rate from B? Is it worth sacrificing for (e.g. taking on part-time supplemental jobs that take time away from our arts jobs in order to make the payments) because it'll be such a good investment?
One thing that gives me pause is that when I used a loan-calculator to run the numbers, I discovered that if we pay B back $500,000 at 5% over the course of 30 years, we'll be paying him nearly $500,000 in interest alone! So we'd be paying him $1 mil for a house that he didn't even purchase in the first place? Would it be fair to propose a rate of 3% (like inflation) instead to approximate how much B would have made if he had held onto the house for an additional 30 years? Would it be fair to propose basing our payments on a reduced price?
If we were to move out of the house instead of investing in it, A and B would sell the house and invest the money in their own estates. (A portion of whatever remains would eventually come to my husband after A's death.)
Is this proposal a better deal for A and B or for us? Or neither? Ideally, we don't want to take advantage of A or B, just find a favorable situation for all of us. But if the deal favors A or B, we wouldn't be opposed to making counter-offers that tilt in our favor.