Options to Buy Out Co-Owners with Private Financing

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Options to Buy Out Co-Owners with Private Financing

Harrisen Hagens
Property Manager · Boise, ID · Member since 2014 · 7 posts · 5 votes

Hi all—

I co-own an LTR with my parents, the property was purchased in 2022 for $240k and is currently assessed at ~$350k. The current loan balance is about $190k and is financed at 7.825%. The payment including insurance and property taxes is about $1700/month and the house is currently cash flowing about $200/month. When we purchased this property we were banking on interest rates coming down (RIP) to make a long-term venture worth the effort.

We've been discussing options to make this property more financial beneficial to all parties (e.g., my wife and I and my parents) and have been discussing a private loan wherein my parents would pay off the balance of the loan and then finance the property to my wife and I at a lower interest rate (4.75-5.25% for 20-30 years). My parents are approaching retirement age and this would set them up a secure source of recurring income and would set my wife and I up for stronger cash flow than we're getting now.

The current ownership is split about 40/60—this was how the down payment was split. So, I'm trying to figure out how the financing on this would work, because although there is only $190 on the loan, my parents are entitled to 60% of the total value of the sell price (appr. $210k).

Can anyone help me understand better how we would structure this arrangement? Would my parents pay off the $190k loan and we would open a private loan with them for $210k? Having a hard time wrapping my head around all the moving parts here.

Thanks so much!

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Andrew Werner
Member since 2022 · 14 posts · 11 votes
1y

The easiest way to do this, if your parents are willing is to have your parents pay off the current loan of $190k and begin paying them as the lender. Your equity position split stays the same. No need to jump through a bunch of hoops with the operating agreement etc. 

Now your parents will begin getting monthly cash flow from the loan payments, AND from the cash flow as an owner. 

All that is required to do this would be to draft a note and Deed of Trust (if you are in a deed of trust state) with the term, amount and rate as would be on any mortgage with your parents as the new lender. Get the payoff from the current mortgage company and pay them off with the new loan from your parents. The mortgage company will file a deed of release and your parents loan will then become in first position.

Now, that is the semantics of how it works, but I would highly advise to just have a title company or closing attorney, depending on your state, to handle the paperwork. They will make sure to get the payoff, handle the deed of release and Reconveyance recording and record your parents new loan in first position. Hope that helps.

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  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    1y

    The specifics of this should be detailed in the operating agreement or whatever contract/documents laid out the ownership, authorities, resolutions, etc. 

    Taking what you wrote at face value, your parents own 60% of the equity and the debt, not just 60% of FMV of the property. In other words, there is $160k of equity in the property, and they would get 60% of that at liquidation, not 60% of the FMV, unless the documents say otherwise. Their portion of the debt would need to be assumed by you or retired out of their proceeds on the 60% of FMV.

    Assuming they are effectively seller-financing their ownership to you in addition to paying off the existing loan, then the new loan would be $190k + their $96k, so $286k total. 

    Anyways, I doubt this deal is going to work out, as the additional $96k in leverage at any rate is going to wipe out what little cashflow there was and then some. Also, 30yr treasuries are yielding 4.96% as of this afternoon. There is no reason for them to lend on a moderately risky deal like this when they can get the same yield risk-free. I get that they are your parents, but this deal isnt fair to them. The rate on this should be at least 6%.

    Last piece, do not count on refinancing into a lower rate anytime soon. Gurus have been predicating rate cuts for 3 years. All evidence points to the contrary right now. I would not expect a rate below 6% at any point in the near future. 

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  • Harrisen Hagens
    OP
    Property Manager · Boise, ID · Member since 2014 · 7 posts · 5 votes
    1y

    Ah, the equity peice was missing from my thought process. Thanks @Patrick Roberts.

    0Reply
  • Ken M.
    Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes
    1y
    Quote from @Harrisen Hagens:

    Hi all—

    I co-own an LTR with my parents, the property was purchased in 2022 for $240k and is currently assessed at ~$350k. The current loan balance is about $190k and is financed at 7.825%. The payment including insurance and property taxes is about $1700/month and the house is currently cash flowing about $200/month. When we purchased this property we were banking on interest rates coming down (RIP) to make a long-term venture worth the effort.

    We've been discussing options to make this property more financial beneficial to all parties (e.g., my wife and I and my parents) and have been discussing a private loan wherein my parents would pay off the balance of the loan and then finance the property to my wife and I at a lower interest rate (4.75-5.25% for 20-30 years). My parents are approaching retirement age and this would set them up a secure source of recurring income and would set my wife and I up for stronger cash flow than we're getting now.

    The current ownership is split about 40/60—this was how the down payment was split. So, I'm trying to figure out how the financing on this would work, because although there is only $190 on the loan, my parents are entitled to 60% of the total value of the sell price (appr. $210k).

    Can anyone help me understand better how we would structure this arrangement? Would my parents pay off the $190k loan and we would open a private loan with them for $210k? Having a hard time wrapping my head around all the moving parts here.

    Thanks so much!

    Keep everything as it is and do a lease option from your parents to you for their portion. Then when they pass, if set up by an estate and tax guy, you inherit the property mostly tax free. Meanwhile, they get the cash flow you are mentioning. Check with your Real Estate CPA. Some CPAs won't understand how to do that. In fact, there are a couple of people who are very capable and investor oriented here on BP.

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  • Harrisen Hagens
    OP
    Property Manager · Boise, ID · Member since 2014 · 7 posts · 5 votes
    1y

    @Ken M. Awesome, thanks Ken. This sounds as though it would serve both parties' interests here.

    0Reply
  • Andrew Werner
    Member since 2022 · 14 posts · 11 votes
    1y

    The easiest way to do this, if your parents are willing is to have your parents pay off the current loan of $190k and begin paying them as the lender. Your equity position split stays the same. No need to jump through a bunch of hoops with the operating agreement etc. 

    Now your parents will begin getting monthly cash flow from the loan payments, AND from the cash flow as an owner. 

    All that is required to do this would be to draft a note and Deed of Trust (if you are in a deed of trust state) with the term, amount and rate as would be on any mortgage with your parents as the new lender. Get the payoff from the current mortgage company and pay them off with the new loan from your parents. The mortgage company will file a deed of release and your parents loan will then become in first position.

    Now, that is the semantics of how it works, but I would highly advise to just have a title company or closing attorney, depending on your state, to handle the paperwork. They will make sure to get the payoff, handle the deed of release and Reconveyance recording and record your parents new loan in first position. Hope that helps.

    1Reply
  • Stanley Yeldell
    Member since 2025 · 116 posts · 52 votes
    1y

    Hey Harrisen, great question and smart of you to explore a private finance option with family—especially with rates where they are.

    Here’s a clean way to think about it:

    ✅ Buyout Amount: Since your parents own 60%, their share of the current equity (~$160k = $350k value - $190k debt) would be ~$96k. If they’re buying out the loan and becoming your lender, it makes sense to “refinance” into a private note with them for their equity + debt, so about $190k + $96k = $286k total.

    ✅ Structure: They pay off the current loan, and you sign a private mortgage/note with them for $286k at 4.75–5.25% amortized over 20–30 years, depending on what cash flow works. You can always do an interest-only period upfront too.

    ✅ Legal & Paperwork: Definitely use a real estate attorney or closing company to structure this cleanly. You’ll want a deed transfer (if applicable), a promissory note, and a recorded mortgage.

    ✅ Bonus Tip: Consider a clause that allows you to refi them out down the road if rates improve, so they get their principal back and you get better cash flow.

    Hope that helps clarify it! Happy to talk through specifics if you want to DM.

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