Creative Solutions Requested to Help Keep House In The Family

9 Replies

I’d love to see what kinds of creative ideas anyone here might have to try and solve the problem this family I know of is having with figuring out how (or whether) to keep their parents’ house in the family. There are so many creative solutions possible in RE, I’d like to hear about which ones might work in this case. Thanks for reading and thinking about this. I’d be especially interested in anything along the lines of using a Trust, estate, or any other legal entity or unconventional solutions, or quit-claiming, or any other ideas.

Here’s the situation: the parents are retired, mid/late 70s. The parents own the house free and clear. The father is in poor health and wants to sell the house soon, so as to leave his wife with zero responsibilities regarding maintaining their house as his health diminishes. They’ve owned the home for many decades, and the mother always hoped one of their children would move into this house, the “family house”. 2 of the 4 siblings live very nearby and if moving back into the family house to keep it in the family were something they could afford today, they’d each strongly consider it. Property taxes and maintenance make it seem unaffordable for them today, but within 3-7 yrs it’s conceivable that one of the siblings could afford to move into the house. But the parents will be forced by the father’s health issues to move to an assisted-living facility sooner than that, maybe even this year. The parents do not, apparently, need the money from the potential sale of their house to be able to afford the rest of their retirement and living expenses. If they did, they’d just have to sell it, obviously. It’s unknown whether the parents would want to pursue anything other than the conventional (simply sell it). But either way, what creative ways can you think of to help them “buy time” on the decision to sell the family house?

-House is worth $1-1.4 million.

-It could rent for probably $4-5k/month easy, but perhaps up to $6k (some have suggested $8k but that seems ridiculous and would probably lead to high vacancy). Affluent area.

-Property taxes of approx $22-25k/yr plus maintenance of probably thousands per year (it’s very old), maybe approaching $10k/yr (guessing), or more.

I thought of possible solutions for this myself, and please tell me how feasible these scenarios might be.

A) Parents move out, and simply rent the house out for a few years until the siblings know for sure whether they could afford to move into it. The siblings would manage the house. Approx $40k/yr in profits (see below)

B) The parents take out a HELOC on the house, take maybe 50-75% LTV in equity out of the house( $600-750k), and use that money as a 25-30% downpayment on some kind of investment property, maybe a $2-3million convenience store / drug store property or a multi family apartment building. Or since making HELOC payments and mortgage payments on the Investment Property would make it difficult to cash flow positively overall, maybe to avoid paying 2 mortgages, just buy a $700k building that has a 8-10% Cap Rate. And the siblings would manage the property manager of the investment property. The amount of equity taken out via the HELOC, and the percentage of the downpayment for the investment property would need to be calibrated so that the profits/cash flow of the investment property (after paying its mortgage) would be enough to cover the monthly HELOC payments, the property taxes, and the maintenance of the "family house". Then they could still rent out the family house in addition to getting the cash flow from the investment property. They could still decide to sell the family house in a few years if it becomes obvious that one of the siblings will not be able to afford to live in it. Monthly HELOC payments would be approx $3500/month at 5.5%.

House Expenses:

$23k / yr Property taxes

$15k / yr Maintenance

——

$38k / yr in expenses related to the house.

+$40k / yr HELOC payments

——

-$72,250/yr. in expenses and HELOC payments

Invest in a $700k Commercial Property bought with all-cash from HELOC, producing at 9% Cap Rate

+$63k in profits.

Rent out the House

$4500/month gross rents ($54k annual)

—-

$44,750 in net profits / yr. (before vacancy)

C) Any other ideas?

Thanks a lot for your ideas!

Heloc can be called due if market tanks, I'd do a cash out refi. You'd lose on closing costs but maybe you can work a deal with lender to do cash out and new buy at once to reduce them.

@Jeff Kelly

That sounds like a horrible rental property. The returns are too low to be worth the effort.

Why not sell it? They obviously need to sell it and the only real thing holding them back is emotions.

The equity would be better deployed elsewhere than in an expensive SFR.

Unless parents have something that will cover dads eventual nursing home costs medicare will eventually be needed. House needs to be sold two years before that or perhaps a trust could help. The parents really need an estate planning person. A lot can happen in 5-7 years. Any chance,to convert to 2 family ? both kids that want to can rent it from Mom or buy it together.

@Jeff Kelly I'm also in the boat of "just sell the house". I think the parents, being retired, wouldn't qualify for a HELOC, nor using that HELOC for a downpayment and the additional financing for a $2-3M convenience store etc. They'd be taking on millions in debt at a time when they should remain debt free.

It's definitely a question for a financial adviser / estate planner to determine the best approach.

Thanks for all the replies so far. Some of you might not have read the detail that says the couple apparently doesn't need the money from selling the house in order to pay for their retirement, etc. That's ok bc it was a long post, so I don't blame you! But I think if they don't need the money, then it would make sense to ask themselves how important it is to them that another generation takes over the house. And if that's important enough, then that's why some creative solution might be required.

I appreciate the HELOC details a lot, such as that it might be difficult to get one with no active monthly W2 income.

I am of the impression that most financial advisers would never think of a creative solution like getting a HELOC, or maybe even the simpler solution of just renting out the house for a while. Does anyone know of such a adviser or estate planner that is more in touch with unconventional approaches?

Originally posted by @Matt K. :

Heloc can be called due if market tanks, I'd do a cash out refi. You'd lose on closing costs but maybe you can work a deal with lender to do cash out and new buy at once to reduce them.

A HELOC can NOT be called due because of market conditions (tanking). It can be frozen at its principle balance but, it can only be called due for a default on the covenants of the loan.

Also, you don't need W-2 income for a HELOC. You need verifiable, consistent, documented income. Retirement income is perfectly fine if they have any. The line amount will of course be limited to whatever the lender's ratios end up being but again, you do not need W-2 income for a HELOC.

@Jeff Kelly The heloc idea might work, sounds feasible at least. I just had a quick note: if they can pull out some equity, before purchasing an investment property (I would probably just buy something all cash in this situation) put some (or a lot) of that money back into the home. If the goal is leaving it for the family, help out the family by reducing maintenance cost. It sounds like the kids may not be that interested in owning the house. I bet if it were in better shape they would be more inclined to figure this out!

@Grant Rothenburger @Ron S. Thanks for that info about the HELOC and when it could be called. I should've known that but it obviously helps clarify this couple's options. And Grant thanks for the suggestion of putting some money into fixing up the house. Excellent idea. The house seems to be in good condition with big capital-type improvements having been made regularly over the years. But fixing anything that will become an issue over the next 5-10 yrs now would be another way to make this plan a little clearer.

Does anyone know how or if it could benefit this family to put the house into a trust? I'm not an expert on trusts.

Originally posted by @Jeff Kelly :

I’d love to see what kinds of creative ideas anyone here might have to try and solve the problem this family I know of is having with figuring out how (or whether) to keep their parents’ house in the family. There are so many creative solutions possible in RE, I’d like to hear about which ones might work in this case. Thanks for reading and thinking about this. I’d be especially interested in anything along the lines of using a Trust, estate, or any other legal entity or unconventional solutions, or quit-claiming, or any other ideas.

Here’s the situation: the parents are retired, mid/late 70s. The parents own the house free and clear. The father is in poor health and wants to sell the house soon, so as to leave his wife with zero responsibilities regarding maintaining their house as his health diminishes. They’ve owned the home for many decades, and the mother always hoped one of their children would move into this house, the “family house”. 2 of the 4 siblings live very nearby and if moving back into the family house to keep it in the family were something they could afford today, they’d each strongly consider it. Property taxes and maintenance make it seem unaffordable for them today, but within 3-7 yrs it’s conceivable that one of the siblings could afford to move into the house. But the parents will be forced by the father’s health issues to move to an assisted-living facility sooner than that, maybe even this year. The parents do not, apparently, need the money from the potential sale of their house to be able to afford the rest of their retirement and living expenses. If they did, they’d just have to sell it, obviously. It’s unknown whether the parents would want to pursue anything other than the conventional (simply sell it). But either way, what creative ways can you think of to help them “buy time” on the decision to sell the family house?

-House is worth $1-1.4 million.

-It could rent for probably $4-5k/month easy, but perhaps up to $6k (some have suggested $8k but that seems ridiculous and would probably lead to high vacancy). Affluent area.

-Property taxes of approx $22-25k/yr plus maintenance of probably thousands per year (it’s very old), maybe approaching $10k/yr (guessing), or more.

I thought of possible solutions for this myself, and please tell me how feasible these scenarios might be.

A) Parents move out, and simply rent the house out for a few years until the siblings know for sure whether they could afford to move into it. The siblings would manage the house. Approx $40k/yr in profits (see below)

B) The parents take out a HELOC on the house, take maybe 50-75% LTV in equity out of the house( $600-750k), and use that money as a 25-30% downpayment on some kind of investment property, maybe a $2-3million convenience store / drug store property or a multi family apartment building. Or since making HELOC payments and mortgage payments on the Investment Property would make it difficult to cash flow positively overall, maybe to avoid paying 2 mortgages, just buy a $700k building that has a 8-10% Cap Rate. And the siblings would manage the property manager of the investment property. The amount of equity taken out via the HELOC, and the percentage of the downpayment for the investment property would need to be calibrated so that the profits/cash flow of the investment property (after paying its mortgage) would be enough to cover the monthly HELOC payments, the property taxes, and the maintenance of the "family house". Then they could still rent out the family house in addition to getting the cash flow from the investment property. They could still decide to sell the family house in a few years if it becomes obvious that one of the siblings will not be able to afford to live in it. Monthly HELOC payments would be approx $3500/month at 5.5%.

House Expenses:

$23k / yr Property taxes

$15k / yr Maintenance

——

$38k / yr in expenses related to the house.

+$40k / yr HELOC payments

——

-$72,250/yr. in expenses and HELOC payments

Invest in a $700k Commercial Property bought with all-cash from HELOC, producing at 9% Cap Rate

+$63k in profits.

Rent out the House

$4500/month gross rents ($54k annual)

—-

$44,750 in net profits / yr. (before vacancy)

C) Any other ideas?

Thanks a lot for your ideas!

 There are inheritance and other related issues.  This is complicated by the fact that there are 4 siblings.  I strongly suggest that the family  speak with a financial planner to examine a number of moving parts that I see as a concern that was not mentioned which further complicates the "family house" idea.