Purchasing Real Estate from Immediate Family Advice

Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes

3y

My wife and I recently relocated from New York City to Olney, MD. My aunt passed last year, and my two cousins inherited her 5 bedroom 2.5 bath house. They were kind enough to allow my wife and I to move in to the house rent free for the time being while we get on our feet here. Our original plan was to stay here for about a year, then buy our own house hack in Baltimore. However, my wife's new job is in Reston, and the commute from Baltimore to Reston would be horrendous - so we are considering staying in Olney. And we are considering purchasing this house directly from my two cousins.

The caveat is we could not afford this house at its market value with a traditional mortgage. It appraised for $665,000 and I think realistically the most we can afford is $450,000. But we really love being in the house and this area. I think my cousins would like us to stay in the house so they can also continue to visit and use it, but also want to make the money off of the purchase. So I am looking for advice from the BP forums as to how we could creatively finance / leverage this deal in a way to make it financially work for my wife and I and get our feet in the door to start buying investment properties. From what I've read online, purchasing real estate below market value from family can be complicated in terms of taxes, lenders, etc. I only want to pursue it if it wouldn't hurt us financially and would allow us to put our saved capital toward a rental property. Does anyone have any advice for how we can go about this? Is it a bad idea for us to try to buy this house?

@Ryan Cramer
It seems like you have two different questions being merged into one here... One about buying the house you are being allowed to live in, and the other about investing in real estate otherwise? Or are you looking to re-sell this house once you purchase it - potentially at a discount as your avenue to investing in real estate? All that could get tricky. You mention "start buying investment properties" but I can't tell if you are considering the house you are buying from your cousin's your first investment property?

In the end I'm left with lots of questions:

Would the cousins be willing to sell it to you below market value to help you out? Just the answer to that one question will definitely start you in one direction versus several others.

Other questions would be, "Would the cousins consider owner financing where they acted as the bank for you... possibly at a lower interest rate. The lower interest rate might mean you could afford to pay them more for the house in the long run? There is also the question of a down payment... ie. do you have money to put down on the house if you wanted to buy it outright? Or would they want a down payment themselves if they carried the note on the property?

Before we can answer your questions, you need some parameters around what your options are, which probably starts with a conversation with the cousins...

Asking them:

What are your long term intentions with the property? Do you need cash today, or are you open to stretching out payments? Do you want the property to stay in the family? Would you be willing to owner finance it in the short term to us? At what price? If we can't afford that price, is there another option they can think of?

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I'm not sure what you mean by "allow us to put out saved capital toward a rental property" when you can't afford the house you are currently living in?. If you have funds saved, are you presuming you wouldn't buy this property you are living in, or wouldn't have to put money down on it? Guess that goes in with the questions above?

I know I'm not much help yet, but hopefully you can guide the conversation.

All the best!

Randy

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Michael J.

Real Estate Agent · Greenville, SC · Member since 2021 · 210 posts · 142 votes

3y

First, I'm sorry to hear about your aunt. Let's honor her memory by making smart moves. Moving in with the family's blessing is a gift, and you've got a potential goldmine of an opportunity. But we've got to navigate this like pros.

Owner Financing: This is one route a lot of folks overlook. Approach your cousins with the idea of them acting as the bank. Propose a deal where you buy the house from them for $450,000. Pay them a reasonable interest rate, spread over a longer term. This way, they still get their money (and some interest), you get the house, and everyone is happy.
Lease Option: You can lease the house with an option to buy it later. This gives you the flexibility to buy it at a predetermined price after a set period, say in 5 years. This gives you time to build capital and maybe the property value aligns more with your price by then.
Joint Venture: Maybe there's a way to partner up. What if you took out a smaller loan for the difference, say $215,000, and created a deal where they retain some equity in the house? This way, you're putting up less cash, and they retain a stake in the home they're emotionally attached to.
Creative Terms: Consider structuring the payment in a way that benefits both parties. For instance, a large down payment followed by smaller monthly installments. This minimizes the loan amount you’d need from a bank.
Consult Professionals: This isn't just some deal off the streets. This is family. Make sure you're getting tax pros and lawyers in the loop. They'll help navigate any murky waters when it comes to familial transactions, ensuring you're not stepping into a tax trap.

As for investing in rental properties, remember one thing: Cash flow is king. If you can make this home work for you, without straining your finances, it could be a springboard for future investments.

Lastly, always trust your gut. If the numbers and terms don't feel right, don't force it. There's always another deal, but you've only got one shot at making smart choices with family. Make it count.

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Brandon Wagner

Real Estate Agent · Northern Virginia · Member since 2021 · 106 posts · 50 votes

3y

@Ryan Cramer

To my knowledge their is no issues with making a below market price sale from one family member to another family member.

A title company is who you will want to reach out to for this. Along with a lender. Happy to connect you with some in MD if you'd like. They have lawyers on staff and will be able to walk you through this unique situation.

In my real estate career I have seen comparable sales and they'll mention that the home was sold to family, so not to use it as a fair comparable sale. (ie they sold it below market value)

You could also look into creative financing strategies to buy it from your family. There is a lot of options that are a little harder to review on a text thread, but essentially buying it at market value, but paying a much lower interest rate say 4%, and your payment will be similar to a $665,000 sale price at say 7% interest rates.

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Ryan Cramer

OP

Architect · New York, NY · Member since 2020 · 7 posts · 0 votes

3y

@Randall Alan I appreciate the quick feedback! I guess I am still trying to figure out the questions myself. Our original goals were always to get our feet in the door with real estate investing by making our first property we buy a multi-family house hack. But now that wouldn't be the case if we do buy my cousin's house. So I want to make sure, if we do buy this house, we're not backing ourselves into a mortgage we can't afford and prolonging our real estate investment career.

I don't think we'd re-sell the house once we purchase, not immediately anyway. I can see it being relatively long term - therefore I'm not looking at it as our first investment property. It may appreciate in value in the time we do own but I don't want to rely on that.

I think my cousins would be willing to sell it below market value - at least one of them. I spoke to one and he said he would be willing to sell it to us at a discount and would love to still be able to use the house. I haven't spoken to the other yet - I know he is emotionally attached to the house, but also wants the pay day to help put his two boys through college. They are going into their senior year of high school, so I think he'll want to sell the house by next Spring.

I have thought about the owner financing - I had thought that would be our avenue until my one cousin told me he was banking on selling the house to put the boys through college. So I imagine that he wants a larger payday then a monthly check.

We do have money saved up for a down payment, but not enough for traditional 20% mortgage at the market value of this house. Originally, our goals had been to put this money into a house hack, so if we do pursue buying my cousins' house, and put all our savings into it, we wouldn't have anything left to invest in real estate.

I hope this helps answer your questions. Still trying to figure it all out ourselves - we thought we had our plans figured out until my wife got her job in Reston, VA and Baltimore was out of the question. I like the area we're in and wouldn't mind buying this house as I grew up coming here all the time and we love it, but I don't want to put all our eggs in this basket and be screwed financially in the long run.

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Randall AlanPro Member

Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes

3y

Quote from @Ryan Cramer:

@Randall Alan I appreciate the quick feedback! I guess I am still trying to figure out the questions myself. Our original goals were always to get our feet in the door with real estate investing by making our first property we buy a multi-family house hack. But now that wouldn't be the case if we do buy my cousin's house. So I want to make sure, if we do buy this house, we're not backing ourselves into a mortgage we can't afford and prolonging our real estate investment career.

I don't think we'd re-sell the house once we purchase, not immediately anyway. I can see it being relatively long term - therefore I'm not looking at it as our first investment property. It may appreciate in value in the time we do own but I don't want to rely on that.

I think my cousins would be willing to sell it below market value - at least one of them. I spoke to one and he said he would be willing to sell it to us at a discount and would love to still be able to use the house. I haven't spoken to the other yet - I know he is emotionally attached to the house, but also wants the pay day to help put his two boys through college. They are going into their senior year of high school, so I think he'll want to sell the house by next Spring.

I have thought about the owner financing - I had thought that would be our avenue until my one cousin told me he was banking on selling the house to put the boys through college. So I imagine that he wants a larger payday then a monthly check.

We do have money saved up for a down payment, but not enough for traditional 20% mortgage at the market value of this house. Originally, our goals had been to put this money into a house hack, so if we do pursue buying my cousins' house, and put all our savings into it, we wouldn't have anything left to invest in real estate.

I hope this helps answer your questions. Still trying to figure it all out ourselves - we thought we had our plans figured out until my wife got her job in Reston, VA and Baltimore was out of the question. I like the area we're in and wouldn't mind buying this house as I grew up coming here all the time and we love it, but I don't want to put all our eggs in this basket and be screwed financially in the long run.

@Ryan Cramer

Your biggest challenge will likely be debt to income if you buy the cousin's house. Your DTI could easily be too high to buy another investment property - plus the needed cash down and reserves. If you bought an existing rental you can use the existing income to offset sone of that new debt. I'm sure the lenders on the board can chime in on all the particulars.

Randy

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Zack KarpPro Member

Lender · Schaumburg, IL · Member since 2015 · 833 posts · 774 votes

3y

@Ryan Cramer easy solution. Gift of equity using a regular Conventional loan. I have helped many others in your exact situation where you can buy the house with $0 out of pocket. Then you can save your capital for investment properties.

If you need any help on how to structure this properly, feel free to reach out.

Best of luck!

847-387-5513

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Ryan Cramer

OP

Architect · New York, NY · Member since 2020 · 7 posts · 0 votes

3y

@Michael J. I really appreciate the thoughtful response!

Owner financing was the first idea that had come to my mind when we started thinking about purchasing the home. If we could somehow acquire it for $450,000 knowing it can sell for closer to $700,000 I would be very confident that we made a good decision and could sell the house later on for a good profit that we can put into future properties. The only caveat is my one cousin recently mentioned wanting to sell the house to put his boys through college (they are about to start senior year of high school this fall) so I think he wants the pay day of selling the house.

The lease option is a good idea. I'd have to see if they'd be willing to defer the pay day and let us lease it for a good bit until we have the capital saved up for our price.

I had definitely not thought of the joint venture - I know one of the cousins' said he'd be willing to sell to us at a big discount and would love to be able to still come to the house. He could potentially be interested in this and retain some equity in the home and essentially help us acquire it from his brother.

How would you see us being able to use this property to springboard future investments? We had originally been saving to buy a multi-family house hack before my wife found her new job. My only concern is if we do buy this house as our primary residence, it would delay us being able to start investing in real estate. I want to make sure if we do purchase from my cousins it is to our advantage financially and puts us in a position to start investing in other properties.

Thank you again for the great feedback!

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Purchasing Real Estate from Immediate Family Advice

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