SFR Investor · Lakewood, OH · Member since 2013 · 11 posts · 1 vote
Hi.
My husband and I are new to Bigger Pockets and to rental properties. We recently purchased our first rental via short sale and are in process of fixing it back up.
We will be renting it to my parents (I know, renting to family can be touchy) and our insurance agent has recommended we draft a lease with a lifetime clause. The house was purchased with the intent for them to live there until they cannot live on their own anymore.
My question is this, does anyone have a draft or suggestions on what the lease should look like?
Thanks!
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
Chuck Redman
The technical name is "Life Estate". The tenant is usually the former owner, who sells the property to another party at a discount with the written condition that the former owner, now the tenant gets to live there rent free for life.
Its a little known real estate acquisition technique, but it is very old, not a new subject.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Did your ins agent say Why to do a lifetime lease? What is the advantage?
Another simialr route is Life estate. They own the property until they die, then the property automatically transfers to whoever is the "Remainderman" I have no idea if there is a benefit in your situation but it might be worth checking out.
SFR Investor · Lakewood, OH · Member since 2013 · 11 posts · 1 vote
13y
The lifetime lease allows us to have a better insurance policy for a better price. Also, it includes everything that would have been covered under a renter's insurance policy which resulted in a savings for both us and my parents.
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
Ned Carey
MaryAnn Houghton
We bought a property that had a life estate. The deed had been transferred from the original owner about 25 years prior. The deed was already in the remainder man's name and the former owner was the tenant of the life estate. So the deed transferred while the life estate tenant was still alive. She out lived the remainder man, though I'm sure that wasn't the original thought. The remainder man's estate was selling the property subject to the existing life estate. This held down the price as most people did not want to buy a property with a non-paying tenant that could not be evicted until she died.
The life estate tenant usually does not pay the real estate taxes or insurance on the property, but does usually pay the utilities. The life estate document also usually prohibits the LE tenant from "wasting" the property or allowing it to deteriorate.
The remainder man had used this real estate acquisition technique at least 12 times buying property from elderly widows, paying them for the property in cash and granting them a life estate to remain in their homes. We actually were the high bidder on two of his properties. The remainder man's estate was trying to sell all his properties to pay his Federal income tax within the 9 month required IRS time frame. So not only were they selling property encumbered by life estates, but they were also under a Federal time limit to consummate the sale. Talk about a Don't Wanter seller.
We bought the property knowing full well that the tenant would be staying for as long as she wanted. The woman had lived in this home for 86 years, she had moved there with her parents when she was 12. Grew up there, got married, had children, became widowed, and then was approached by the remainder man real estate investor. He was considerable younger than her by almost 3 decades, and I'm sure he thought that he would out live her. However at 98 years old she was still living in that house when we bought it.
There are actuary tables, life life insurance tables, that value life estates determined by the current age and gender of the life estate tenant.
We thought that due to the tenants age that it was a calculated risk.
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
I own a property my mom lives in. I take care of her, but she is independent, so she lives in the house with no rent. Believe me, no one can seem to understand this concept.
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
Chuck Redman
The technical name is "Life Estate". The tenant is usually the former owner, who sells the property to another party at a discount with the written condition that the former owner, now the tenant gets to live there rent free for life.
Its a little known real estate acquisition technique, but it is very old, not a new subject.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
Originally posted by Chuck Redman:
Do I understand that this person lives there rent free?
Yes because the person living there owns the house. Who are they going to pay rent to themselves? Of course there could be some side arrangement where they pay someone the equivalent of a rent.
David Krulac, that's a great story. I have wondered if there was some creative way to use life estates in my investing. I love doing creative stuff that no one else will or can do.
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
Ned Carey
The way these Life Estates were set up, he did 12 of them with elderly widows, was that the buyer became the deeded owner and the former owner, the elderly widow became the life estate tenant.
I don't know if this could be made an exclusive technique, and abandoning all others, but its like having another arrow in your quiver.
Where I think that it would work best is:
1. Elderly person who wants to stay in their own place and not move and either are capable of living by them selves or have assistance.
2. Ideally there would be some other source of rent since the tenant is not paying rent. So maybe an owner occupied multi-family. Or an owner occupied property that had some commercial on the property. Or some extra land that could be subdivided off.
Or a property with 2 houses on 1 property that could be subdivided.
3. By buying the property while the owner is still alive, would get you the Life Estate discount, as well as helping the LE tenant make their estate planning just that much easier, since their residence would not be part of the estate. (and presumably not subject to estate and inheritance taxes either.)
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
13y
Life Estates are sometimes called a poor mans will. It enables the elderly to turn over ownership of a property to a child but not be thrown out if the child gets in fiancial trouble, becomes divorced etc. It is also helpful because if they must go into a nursing home and cannot afford to pay for it, the 5 year limit on transfers for medicare can begin running while they are still able to live in their own home. Some large estates use it to reduce inheritance taxes because the property they transfer to their children ie reduced in value because of the lack of ability to use it until the death of the parents. It is possible for the life estate tenant to grant their life estate to the remainderman, thus merging and destroying the life estate. If you are trying to buy the life estate it of course increases the cost of the acquisition.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
David Krulac one place I thought it might work for me is if I do a tax lien foreclosure on an elderly person that I would not want to kick out of their home.
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
Ned Carey
Sure you could use Life Estate in that situation, but if you already purchased the property through the tax lien process, you wouldn't need to do a formal Life Estate, as you could have the same effect with just a lease specifying a life lease.
One caveat would be that often times the docs are worded that it is the tenants for as long as they live. This would enable the tenant to move out, like in the case of going to an assisted living home and collect the rent from the life estate home. This may or may not be your intention. You may want it worded such that when they leave the house, ven if still alive that the Life Estate is ended.
SFR Investor · Lakewood, OH · Member since 2013 · 11 posts · 1 vote
13y
Thank you for the interesting disucssion on Life Estate and story about the Life Estate. In this case though, it is a lifetime lease which is slightly different from what we have been told. The Life Estate is more commonly known about.
Our understanding with the lifetime lease is that it is similar to a normal lease and the tenant pays rent. At least that is what we currently have set up. The difference is that the lease term is for the lifetime of the tenants. Often this option is good if the tenant is an older parent or relative of the owner.
Our verbal agreement is that they cover all the maintenance and repairs/improvements. We have not written a lease before (our first rental) and are having a hard time getting our brains wrapped around how to construct a lease that would give them lifetime rights to live in the house.
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
13y
MaryAnn Houghton
Sorry for the digression on Life Estate.
There are a couple of legal items that might affect your lifetime lease.
I'm not 100% on this and this goes far back into the reaches of my memory, but I seem to recall that Pennsylvania law limited residential leases to a maximum of 3 years. I think the intention was to protect the tenant from entering into a long term lease and not being able to get out of it.
The second one is Federal law, namely the IRS. This also is reaching far back into my memory, but I thought that there was an IRS provision that any lease for longer than 30 years would be considered a "sale" for tax purposes.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
MaryAnn Houghton - David Krulac makes some good points. Since the three of us are all in PA, we have to follow the PA laws on landlord tenant stuff - things like having a "plain language lease", how much the security deposit can be, etc. I wish I could be of more help, but before you offer something, be sure that it will hold water under the eyes of the law.
Residential Real Estate Agent · Pearland, TX · Member since 2013 · 163 posts · 32 votes
13y
Originally posted by Ned Carey:
Originally posted by Chuck Redman:
Do I understand that this person lives there rent free?
Yes because the person living there owns the house. Who are they going to pay rent to themselves? Of course there could be some side arrangement where they pay someone the equivalent of a rent.
I guess I do not understand. I thought y'all were saying you bought these properties and the elderly person gets to keep living there until they pass away?
SFR Investor · Lakewood, OH · Member since 2013 · 11 posts · 1 vote
13y
David Krulac and Steve Babiak, Thank you very much for your thoughts. They are appreciated. We will investigate limitations of lease terms.
One more wrinkle that should be considered, while we do reside in PA, the home is in Michigan.
We have a lawyer in MI that has agreed to review the final lease draft (he rode the short sale rollercoaster with us during our purchase last summer) to ensure it protects us and my parents, but he recommended we draft the lease since we would need to iron out the details as well.