Equity Rich and Cash Poor: A Real Life Case Study on How I Saved My Mother’s Home

by | BiggerPockets.com

Since the time I was a small child, my parents preached what seems to be the declaration of their generation: study hard, go to college, get a good >job, pay off your home, and live happily ever after. Having worked as a financial planner I feel that this is a common philosophy from the “depression baby” generation. Now as I look at this plan after being not only a financial planner but also an insurance agent and long time realtor/real estate investor, I can sincerely see how short sighted this theory is especially today. First of all people are living much longer, yet the retirement age has hardly increased[1]. The philosophy I mentioned above also makes no mention of investing (only working hard) and the nest egg that most of the people who believe in this ethic have is the equity in their house – and with a paid-off house this nest egg is relatively illiquid and has most likely never made a return the entire time they’ve owned it[2].

But it’s not just looking at the facts for me to come to this decision. I also can see this because I’m dealing with it first hand, assisting my 80 year-old mother with her estate planning and investment portfolio. Living by the mantra of her generation, almost 10 years ago when it came time to determine what to do about her living situation, my mother was at a standstill financially. She owned her house outright, was on social security, was fortunate enough to receive a small pension from when she worked full-time, and she still didn’t have enough money to stay in her home comfortably for the rest of her life. And to her and many other seniors, staying in your home was their original dream and primary goal.  They didn’t plan to fail, they just failed to plan. In the case of many of these people, like my mother, many senior citizens are “equity rich and cash poor.” So around 2005, Mom was considering these three feasible options:

Option One: Sell and Downsize

Mom could sell her home and either go into a retirement community, buy a smaller condo, or rent an apartment and pray she didn’t outlive her income.

Pros: In all three options she would obviously be downsizing so there’s little to no maintenance, cheaper utilities, and she would have neighbors (something she wasn’t used to in her 4 bedroom house).

Cons: Most retirement communities in our area are really expensive. If Mom did sell and decided to rent it would not only cost her to sell, but to buy a condo is pretty expensive not to mention you also have to pay the condo fees along with taxes and insurance. And with a condo or even an apartment she rented, Mom could definitely run the risk of outliving her income. But the biggest con to Mom was that she lived in and owned her home since 1964, moving in general would be a big unwanted change.

Option Two: Reverse Mortgage

The second choice was a reverse mortgage. A reverse mortgage is a loan available to homeowners or homebuyers, enabling them to access a portion of the subject home’s equity. The homeowners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof.

Pros: Without heirs, this could be a good option because it’s basically income you could use to live or stay in your home.

Cons: The fees and points can be really high. This can also reduce most or wipe out most small estates.  Also, many major banks aren’t writing this type of loan anymore because default rates are higher than for regular mortgages[3].

Option Three: Son to the Rescue

Third, the heir(s), which was me in this case, could purchase the home from Mom and invest the proceeds in a separate LLC.

Pros: You can invest and not only pay her expenses and debt, but also turn a profit by investing the remaining capital.

Cons: As the majority owner, I have to pay taxes on a large portion of what the entity makes after expenses. I’m responsible for how well the LLC performs and the biggest threat would be that if I became disabled how well could I continue to manage the LLC’s portfolio.

Our Decision

With mitigating some risk, we decided upon option three, utilizing an LLC to run a portfolio of property and mortgage notes because we could satisfy several issues at once. Mom could stay in her home, generate income for herself, limit taxes, and leave an estate where there usually wouldn’t be one (or much of one). This last one is key because Mom saw her own mother go into a nursing home for five years after a car accident and then proceeded to witness the nursing home fees wipe out the proceeds of her family’s estate (*note* Nursing home fees can deplete assets and income. Plus today they have a 5-year look back so even if she sold me her house a year before going into a home, they’re still going to charge my Mom like she still owned the asset).

Mom also couldn’t really benefit from her paid off primary very much because she was limited in write-offs and she didn’t really have much earned income. I on the other hand, with too much earned income, could always use the write-offs of another investment property (that in this case was rented to Mom). So, I decided to buy Mom’s house and put a $200K mortgage on this $250K house so Mom wouldn’t exceed the capital gains exemption. We cleaned up some credit card debt of Mom’s and then proceeded to fund our LLC.

Now here’s the cool part, Mom only owns a very small percentage of the LLC and I own the majority, but Mom is the manager and receives a monthly income. This is from three properties, private 1st mortgages, and performing 2nd mortgages. Our LLC’s investments have thrown off enough cash flow to pay the mortgage, taxes, insurance, maintenance, as well as mom’s draw. In fact, our little fund is growing quite nicely and our notes are starting to buy more notes!

Just in Case

One potential issue was if I were to pass away ahead of my mom, how would mom manage the LLC? So, I took out a life insurance policy on myself that was one and half times what Mom’s estate and assets were worth, plus she’d still control all the notes that would continue to generate income. The insurance is also paid for by the profits from the LLC. We also set up a trust for the proceeds of this insurance policy, so as to avoid the $350K estate that would be created from this policy. Now the beneficiary of this trust is my Mom of course and her friend is the trustee. After all, it’s best to control assets and not necessarily own them, as we get older.

Related: BP Podcast 005: Dealing with Death – A Financial Discussion with CFP Neal Frankle


As for the estate planning strategies that were accomplished, Mom pretty much has no real estate or taxable assets left to pass on, no significant assets that a nursing home could potentially seize in the future (especially since we did it over 5 years ago now) and Mom can now afford to stay in her house forever without depleting anything. This took a little work but it was a great way to keep Mom in her home, give her nice portfolio of assets, and hold onto my childhood home in the family. Now of course when all this was set up we incorporated these tax saving and estate planning strategies with an accountant and estate planning attorney all on board. So please do keep that in mind if you’re thinking about doing something similar. Everyone’s situation is different, but my point is to get you thinking.

As I quickly am approaching the time I’ll be receiving my senior citizen discounts, I too need to think more about controlling more of my assets without necessarily owning them all.


[1] http://www.ssa.gov/history/lifeexpect.html

[2] Andrew, Douglas R. Missed Fortune 101: A Starter Kit to Becoming a Millionaire. New York: Warner Business, 2005. Print.

[3] http://www.nytimes.com/2012/10/15/business/reverse-mortgages-costing-some-seniors-their-homes.html?pagewanted=all&_r=0

Photo: 401(K) 2013

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


    • Jason,

      Thanks for the response! As far as avoiding estate taxes, if you change the ownership of your parents’ assets but they still control it you’re in the perfect situation. Like I said at the end of the article Mom pretty much has no real estate or taxable assets left to pass on (avoiding estate tax) and there are no significant assets that a nursing home could potentially seize in the future. She also didn’t have to pay transfer tax when selling me the property because I’m her son, AND she avoided the capital gains tax because fortunately at the time the gain was less than $250K for an individual. Plus I got some extra needed write-offs!

      Best of luck with your folks,

      • The part I’m fuzzy on is, could this possibly trigger any gift taxes? IANAL, but one thing I’ve read is that there is no statute of limitations on gift tax avoidance. Go figure. When it comes to taxes, the government reserves the right to pursue you until the end of time. For fun, go look up the word imputed. Many things that wouldn’t register on our radar screen may turn up on the IRS’s. Kind of like how “boot” when doing a 1031 exchange has some weird situations that don’t make any sense in the Real World.

        • Greg,

          I’ll have to circle back with my accountant, but I don’t believe we had any gift issues because I wasn’t “gifted” anything. I purchased the property from her on my own. And let me reiterate, we formed an LLC but the house was NOT in the LLC.

          – Dave

    • Ron,

      It depends on the type of notes you buy, but the ones I specifically mention in the article are performing 2nd mortgages. Those are some of the cheapest institutional notes you can buy. My company PPR (www.pprnoteco.com) sells these type of notes, and the average price is about $15K but occasionally some go for less.

      There are other companies that sell performing notes as well, you could also check out Granite Mortgage Solutions or Gemini Capital Managers.


  1. Sounds like a nicely setup plan Dave! You really tapped the equity quite nicely and turned it into a cash flow machine that supports everyone quite nicely.

    You mention how dated this advice is. It definitely shines a light on the fact that decades ago, people retired with pensions. That just isn’t the case anymore for a huge majority of people. Hence, something else is in order to handle retirement, and sadly, it isn’t the 401k.

    • Greg,

      Completely agree with you. The responsibility is completely on the individual nowadays since the government and Corporate America aren’t in the retirement business like they used to be. My best advice for these people is for them to do their best to get educated and properly utilize Self-Directed IRA’s.

      – Dave

  2. We’ve been working through a similar situation with my father. We took another option which isn’t open to many people. His home is lake front on a double lot. We are selling most of the second lot to the neighbor. It’s big enough to build a lakefront home on, so he is getting a good amount for it. If he uses that up, I like your third option, too.

  3. George Paiva on

    Dave, great option that I may consider as well. I’ve been positioning my Mom to do this as well. Now when you purchased her house through an LLC. Did you use a mortgage from a bank? What pitfalls or barriers did you encounter when doing this?

    • George,

      I didn’t purchase her house in an LLC, I purchased it in my own name. And yes I did use a regular mortgage from a bank, with 20% down interest only for 10 years so as to minimize payment to maximize investment dollars (that in turn made higher yields than the mortgage interest rate).

      Best of luck,

      • George Paiva on

        That may actually work out better. My brother has shown interest in the family home. I am definitely going to look into Missed Fortune 101 by Doug Andrew.

  4. Thank you so much for writing this article. I know so many people in similar situations with their elder family members. It’s stressful at the time, and worrisome to yourself to ponder how you won’t end up in the exact same place yourself!

    • Christine,

      Like I said in the article, I know the feeling! Being a planner helped me a lot but a comprehensive place for folks to start is a great book called Missed Fortune 101 by Doug Andrew. His book talks a lot about legacy planning, estate planning, and is a great source for ideas.

      – Dave

  5. So many of the retirees I know fall into this category of having lots of equity but very little cash. Financial strategies are not only daunting to these people, but they’re also difficult to understand – which is why case studies are so helpful, I think. People can relate to case studies because they’re essentially stories. Thanks for writing this, and I’ll be emailing it to someone I know who can benefit from reading this story.

  6. Steve Brooks on

    Dave, I have to admit that the title resonated with me because my parents, though younger, are in a similar situation but, being a newbie (as in 0 experience and 0 property) I got lost on some of the technicalities.

    Wondering what you, or other readers, would make of this scenario:

    Parents 55 both working; little cash/investments; $100,000+ in equity in their house; excellent
    credit. They will have to sell their house at some point to capture equity and have something to live on.

    I moved in with them because I was renting and thought my rent would be better spent on their home to finish improvements and getting it ready to sell. Also planning to save and purchase my own house eventually. I have no assets and roughed up credit but $100,000+ in income (wife’s included).

    Now we are thinking of just buying my parents house when we can- they would get the cash, we keep the family home (an important factor), and they could just stay with us if need be.

    I feel like we’re missing something big! We’re four working adults, all with an interest in real estate, professional construction experience, equity and credit available (to two of us) and we live and work together well.

    I’m open to all suggestions and dying to learn – any feedback from the community would be HUGELY appreciated.

  7. Steve,

    You’re doing the best thing possible right now, and that’s asking these questions early.

    Your situation is a little bit different but you may have an additional option I didn’t have, my mom didn’t have a mortgage, your parents do. You parents could sell you the property with owner financing (you will need a Real Estate attorney to explain what the best way to do this is – and it’s state specific, let me know where you’re located and I can most likely recommend one).

    So what does this mean? This is where you buy the property from your parents and take over their mortgage payments without having to pay mortgage company fees or be affected by your bad credit. They have a few options, depending on their cash flow or future investing needs. Now I don’t know the property value and I don’t know what their first mortgage balance is or how many years left remaining, if you want to give me that info I could map out a few scenarios you could take to your parents and/or attorney.

    But the good news is, you’re looking ahead and there is a win-win solution in here somewhere.


    • Steve Brooks on

      Thanks, Dave. We live in NJ and would definitely be interested in talking to an RE attorney if you have any recommendations. I’d be happy to share some of the details ans so appreciate the offer to throw some scenarios my way.

      I don’t know all the details about their cash flow or years left on the mortgage but I know the mortgage amount is just under 300k and the house is worth 400k conservatively based on recent sales in the neighborhood.

      So transferring the house with owner financing sounds like a good way to go. Also, though, I’d like to figure out a way to get that equity working for them/us.

      Thanks again!

  8. Sure Steve, no problem! I would try Steve Hladik (215-855-9521) who is licensed in PA and NJ.

    If you/your parents are looking to capture the equity in their home, it might make sense for your parents to take out a HELOC (Home Equity Line of Credit) before they sell you the house. This could be a better strategy since you could keep the home and they would probably get a similar amount for the equity. If your parents take out a HELOC they would most likely 80-90% of FMV (Fair Market Value) which means they would have access to anywhere from $20K-60K if the house was worth $400K. Not sure how much Real Estate you could get with that, but you could invest that money in tax liens, notes, or unsecured debt (you can invest in unsecured debt on sites like http://www.lendingclub.com).

    If you want to do hard Real Estate I would recommend joining a group like SJI (South Jersey Investors) or another national REIA group like it in your area. You could learn a lot as well as find hard money or private money for your Real Estate deals (so as not to use up your own).


  9. Hi Dave
    I have a son Jason. There’s so much to my wrongful foreclosure after 22 years
    I ended up with exclusive grant deed court ordered clerk of court signed x off 1998 I had this completed 4/2006 received note stamped with seal micro filmed
    Plus a ballon payment paid in full. Heard Mers and sub of trustees banks had no standings only I’m still in my car at 55 disabled scared to death. My son stopped speaking to me my daughter in law said never text her again. I’m confused this was ca
    March 29 2011 lock out didn’t miss payment from jan 2007 to march 17 2010 this jan 2013 CFPB said foreclosure started one two years prior how?
    I know there’s so much only my ignorance to knowledge hasn’t helped nor my side tracking today can’t comprehend great plus it’s tough to articulate my words I feel my boys now grown men are embarrassed of me. I’m sick of living in my car. It’s hot over 100 out god help me and every other American who had their American dream stole out from under them as I
    God help us

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