Creative Financing Idea – Fiancée Buys Mom’s Property but Mom Keeps the Rent

[Dominic Emory]

Hey BP community,

Looking for some feedback on a creative structure we’re brainstorming.

My fiancée’s mom owns several rentals and wants to start passing them down to avoid the 5-year "look back" for medicaid, but she really values the monthly rental income and doesn’t want to lose it as it is part of her retirement plan. As part of this she is going to gift my fiancée a house, but wants to maintain the rental payments monthly.

Here’s the idea we’re considering:

• - My fiancée would take ownership of one of her mom’s properties (title in her name).

• - She (and I) would then refinance that property and use the cash-out proceeds and our savings to buy another property outright (potentially to run a BRRRR on).

• -Even though my fiancée would own the original property, we would continue paying her mom the rental income from it. So she keeps her cashflow.

In theory, mom gets to hold onto the steady income, while we use the equity to be able to buy a property cash. This comes at sort of a weird time as well because we are gearing up to buy a multi-family with traditional financing and if we went with this method we would need to use the capital from that for the cash property. So it's a one or the other situation. 

A few things we’re trying to figure out:

• - Is this type of setup advisable, or are we setting ourselves up for trouble?

• - Is leveraging this house and bailing on our traditional financing plan worth it to be able buy with cash and get the benefits that comes with it?

• -Is BRRRR a viable strategy in New England? We are in a pretty expensive market and is seems like BRRRR'ing can be tough.

• - What legal/tax/estate planning considerations should we keep in mind if ownership and income are separated this way?

• - Has anyone here structured a family deal where ownership passes down but the previous owner still collects the rent?

We’re still very early in brainstorming this, so any creative insights, pitfalls, or real-world experiences would be much appreciated.

[Dominic Emory]

Quote from @Mike Grudzien:

You start by saying mom wants to reduce income to qualify for Medicaid, but then you say she wants the income from the property.  So, which is it??

Good catch, I should clarify. What I was referring to is the 5-year Medicaid lookback. If her mom gifted or transferred the properties now and then needed Medicaid within five years, that could create eligibility issues and penalties. For example, if someone has assets (like a house) that put their net worth above the threshold, they won’t qualify for Medicaid. And if they try to qualify by gifting or selling assets for less than fair market value within five years of applying for long-term care Medicaid, the state can impose a “Medicaid penalty period” during which they’re ineligible.

So, the idea here isn’t that she wants to reduce her current income to qualify it’s that she wants the flexibility to transfer assets without triggering that penalty. The reduction in income to qualify is a different thing.