Help with analysis on a 2 family with a life estate

Boston, Massachusetts
Real Estate Deal Analysis & Advice
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Help with analysis on a 2 family with a life estate

Cody RohlandPro Member
Realtor · Marshfield, MA · Member since 2023 · 7 posts · 2 votes

Hi all! We have the opportunity to purchase a 2 family in a very desirable area (due to it's proximity to public transportation) close to Boston. 2 bed/1 bath on each side. Rehabbed, this property would probably sell for $850,000-$900,000. The kicker is we have to give the owners, who live on one side, a life estate. They are both in their 70s and he is experiencing some dementia and will probably go to a home soon. His wife would stay. It is in need of updating on both sides (the rehab will probably be $50,000-$75,000 for each side), but we would only update the vacant side to put a tenant in it initially. Rent (depending on the upgrades) would be $2500-$3000/month. We would have to bring $250,000 cash to the deal to pay off their HELOC and a tax lien. After that the owners are willing to carry the note for the additional income. We have not negotiated the interest or the purchase price at this point, but figure that a 7% interest rate is what they would probably want. We are not really sure how to analyze this deal to figure out what to offer for a purchase price as the 2nd unit is valuable, but we don't know how long the owners will live. Properties do appreciate better than average in the area so this would be more of an equity investment, at least initially. Anyone out there know how to do this?

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  • Zach Whiting
    Real Estate Agent · Foxboro, MA · Member since 2023 · 12 posts · 4 votes
    2y

    Hi there - I'd assess the time value of your money and break down cash flow considerations for the existing investment (1 unit) and future value of the cash flow as well as the appreciation in the property itself.  You'd be committing quite a bit of capital (250k purchase + 100 or 150k rehab) So somewhere in the neighborhood of 350-400k.  

    Personally I'm not a fan of life estates as they can go on for longer than intended and prove to be very personal and emotional - deviating entirely from the business purpose you set out with.  BUT - a good deal is a good deal and depending on all the specifics can certainly be well worth the effort.

    I would do my best to negotiate a lesser interest rate than market.  Maybe 5%?  As the entirety of the expenses would be on your plate and only half the rental income.  When structuring, typically I value out a rental amount for the unit (rather than try to get a larger amount off the top off the purchase price).  The "rental" amount would reduce the note due, the backend principle.  In that way, its much like a reverse mortgage.  I do typically provide a fixed rental amount for the life of the transaction.  

    That doesn't work for everyone - and some would like more capital up front.  You can always ballpark value and offer a flat dollar amount.  900k less 150k reno = 750k purchase less value lost on rental 2500/mo for 5 years?  10 years?  Hard to say.  That will significant change the offer amount.  

    It's a very grey area.  The seller wants security which is understandable.  The last option is a staggered buyout where the property is priced at xxx after 3 years, 5 years, 10 years etc.  That is more of a option to purchase where you would hold a lien for the initial amount contributed and paid into the property via the note.  The improvements wouldn't be included though and those funds would be depreciable to you and written off if not purchased in the end.  


    All of these are just creative ways to solve a problem - how to marry it to your scenario entirely depends on the sellers financial literacy and comfort with the situation. Generally one of these scenarios emerges as a front runner from conversations with the sellers/heirs/POA. Don't be afraid to ask them questions. Good luck!

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  • Cody RohlandPro Member
    OP
    Realtor · Marshfield, MA · Member since 2023 · 7 posts · 2 votes
    2y

    Zach! Thank you so much for your suggestions and input! Excellent advice! I’m not sure yet how this will pan out as some of the other family has gotten involved, but we shall see and I really appreciate the multiple options you laid out. Thank you! 

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