Opinion on a house hack? What are the cons?

Question

My brother went thru a hard divorce leaving him with no assets at 47yrs old. He's a blue collar worker making about 55k in Baytown Tx. He's never bought a home so he is still eligible for an FHA. Our thought process is for me to front him all the money for a multifamily home. A fourplex is the only option for it to be financially beneficial to me. I would front the money, he would take out the FHA loan and live rent free for a year. I would collect all rents and he would just save his money allowing himself to get back on his feet. After a years time I would then charge him a minimal rent say 500-800mth. Has anyone ever done this or heard of an arrangement like that?

If he wanted to leave the home for any reason after the year could he transfer the loan to me? I’ve used my own fha loan already.

Manny Cirino · Answer

The lender would never really find out about this arrangement(unless they read BP) so that is the least of your worries. The bigger concern here is that you have no way of controlling the agreement. Everything will  legally be in his name and he could switch up on you at any minute and you can't do nothing about it. You know your brother better than any of us just be sure it's a loss you can afford, because money makes people do strange things.

Pat Butler · Answer

@Justin White

His loan, his home! Not certain how the lender would be reacting to this scenario.

Best to consult an attorney to avoid the appearance of a straw purchase.

Anthony Wick · Answer

@Justin White  The biggest problem I see with this is; it is very doubtful a lender will give him an FHA loan within this scenario. The down payment needs to be "gifted", but it also is clear that nothing in this scenario would meet fha guidelines. He would have to lie to the lender to obtain this loan. And if they find out he lied, or that a business agreement exists between the two of you that clearly shows you are actually the owner, then it could be bordering on mortgage fraud.

And I'd like to see the property and the numbers wherein he is going to live for free and you are going to cash that much money from 3 of 4 units.

John L. · Answer

Cons that jump out to me are:

1) Can the property make a return to you without the 4th rent (and do you care in this situation)?

2) Preparing for capital expenses seems important since you are ultimately paying them.

3) It will be hard to have a contract around this since the lender will most likely ask your brother if the down payment is borrowed. Having documentation to the contrary could be problematic.

Taylor L. · Answer

i don't understand how he'd be paying you rent after that first year. The mortgage and property would be in his name. Who is paying the mortgage? What is the exit strategy?

Evan Polaski · Answer

@Justin White  Asking here is a great place to start.  I would have a clear line of how the purchase price is determined, if he chooses to buy you out.

You are allowed to gift people up to $10k/yr (double check with an accountant) tax free, so that could be shown as his source of downpayment.

Since the house will be titled and mortgaged in his name, I would be sure there is some legal contract in place too.  Property Management would be best, but you may need to be a licensed realtor to act as one in your state.  Some sort of partnership that gives you a level of ownership is probably more accurate, and since you are an owner, you can legally manage your own properties without license.

While he is family, and you are trying to help him out (very commendable), you sort of need to treat this like a prenup.  Prepare for things to go sideways, even though things will likely work out just fine.

Marlen Weber · Answer

@Justin White It is generous of you to help your brother while he faces difficult times. While things are likely to work out just fine, consult an attourney to avoid future mishaps with rent, etc.It is best to have things squared away from the get go especially when dealing with loved ones.

Anthony Wick · Answer

@Manny Cirino

Many a people are arrested every year, even though “nobody will ever find out”. Just saying, it is always best to follow the law and to follow your contractual obligations. Kind of like when people say; “a mortgage company hardly ever enacts the due on sale clause”. That’s of little consultation to you, if it happens to you.

Justin White · Answer

@Manny Cirino @Pat Butler @Anthony Wick

Thank you for the replies. Some good points to think about. I’m going to talk to my real estate attorney and my mortgage broker in detail. I would hate to lose money or have my brother act funny when rent is due after the year.

Justin White · Answer

@Evan Polaski @Eric Johnson thank you both for the clear and concise replies.

Opinion on a house hack? What are the cons?

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