Buying a house for family

[Smolinsk]

DH and I are thinking about buying a house for his parents to live in.  My IL's live paycheck to paycheck, they can barely cover their bills, and they currently pay $1000/month in rent.  My husband and I have been looking at houses in their town and it looks like we could buy something pretty inexpensive and the payment would be under $500/month.  Our thought is to buy the house and then have them pay us rent in the amount of the mortgage payment so they would have a little more breathing room in their budget.  Has anyone done this before?  I'm looking for some advice on things we should be thinking about if we decide to go through with this idea. 

[krystee]

I would have them sign an official lease even though they are family, and only do this if you have a good relationship, you believe they will pay you, and you can cover the mortgage if they don't pay you. Do you have the means to easily cover broken appliances, leaky roofs, etc.? If not, be sure to charge more than just the mortgage/property tax you owe (if market rate supports more than that). We spend about $1,000 per year on fixes/replacements, $700/year on insurance, etc.

[dr.girlfriend]

Here's some things I would be thinking about:

How much input would they expect to have on the purchase? If you find something that's reasonably priced but they don't think it's nice enough will there be hard feelings?
Who will be in charge of maintenance?
Will they be paying PITI or just P+I? Are you prepared to eat the cost of T&I every month?
What happens if something occurs (job loss, injury) and they can't cover the payment? Can you potentially carry the whole thing?
What would happen if they didn't pay you? Or said they would pay later but then you saw them spending money elsewhere? Or they decide they want to retire?
What are the tax implications for you?

I think it's a super generous offer and makes sense in the overall financial sense, but relatives and money can be fraught with issues. My in-laws were reeeeallly bad with money and my DH and I decided we would help them on a case-by-case basis if asked but wouldn't get involved otherwise. They were living hand-to-mouth and always had these crazy get rich quick schemes...like they were going to flip houses even though they wouldn't qualify for loans and had no home renovation experience, or they were going to day trade stocks. It made me crazy. So, maybe I'm personalizing, and your in-laws have a great reason for still living paycheck-by-paycheck at their age, or maybe they are bad with money and this will cause a lot of potential friction once your finances are entwined.

IDK if this is possible, but a potential alternative would be if you could give them an amount towards a down payment that would allow them to purchase a house on their own, or help them repair credit in a way that would make them more eligible for a loan, or something like that.

[lolalolalola]

We purchased a home for my MIL to live in. She pays us rent and she pays utilities. We manage the property like it an investment property, from an accounting and tax perspective. DH does almost all of the upkeep and maintenance just like any landlord would.

We went into it knowing that if she ever stopped paying rent for whatever reason, we would be stuck supporting her. Or, if she hated it and moved/left, we would be stuck with the property. 

[Smolinsk]

Thank you all for helping me think through all of this. It’s definitely a hard decision. On one hand I want to help them get to a better place and I’m worried they won’t be able to make their rent and will end up homeless, and worse, I’m worried that they’ll want to move in with us. On the other hand, I don’t want to put my family in a bad financial situation. My ILs have looked at a house that needs a lot of work but is $40k. My FIL does construction so he would be able to do a lot of work in the house himself. We don’t live in the same state but my husband still had friends who do so I think we’re going to start by having a trusted friend go look at the house and give us his opinion. If he says the house is in rough shape but could be improved with some work, we may look at moving forward. If he tells us it’s a disaster and is minutes away from caving in on itself, we’ll scrap this idea.

[dr.girlfriend]

Feb 21, 2018 20:25:16 GMT -5 Smolinsk said:

Thank you all for helping me think through all of this. It’s definitely a hard decision. On one hand I want to help them get to a better place and I’m worried they won’t be able to make their rent and will end up homeless, and worse, I’m worried that they’ll want to move in with us. On the other hand, I don’t want to put my family in a bad financial situation. My ILs have looked at a house that needs a lot of work but is $40k. My FIL does construction so he would be able to do a lot of work in the house himself. We don’t live in the same state but my husband still had friends who do so I think we’re going to start by having a trusted friend go look at the house and give us his opinion. If he says the house is in rough shape but could be improved with some work, we may look at moving forward. If he tells us it’s a disaster and is minutes away from caving in on itself, we’ll scrap this idea.

Is a 40k house really a $500 mortgage payment?  I stuck it in a calculator and it came to more like $150.  If a $40k house is livable I think that changes a lot.

[Smolinsk]

Feb 21, 2018 20:49:23 GMT -5 dr.girlfriend said:

Feb 21, 2018 20:25:16 GMT -5 Smolinsk said:

Thank you all for helping me think through all of this. It’s definitely a hard decision. On one hand I want to help them get to a better place and I’m worried they won’t be able to make their rent and will end up homeless, and worse, I’m worried that they’ll want to move in with us. On the other hand, I don’t want to put my family in a bad financial situation. My ILs have looked at a house that needs a lot of work but is $40k. My FIL does construction so he would be able to do a lot of work in the house himself. We don’t live in the same state but my husband still had friends who do so I think we’re going to start by having a trusted friend go look at the house and give us his opinion. If he says the house is in rough shape but could be improved with some work, we may look at moving forward. If he tells us it’s a disaster and is minutes away from caving in on itself, we’ll scrap this idea.

Is a 40k house really a $500 mortgage payment?  I stuck it in a calculator and it came to more like $150.  If a $40k house is livable I think that changes a lot.

I was factoring in insurance and taxes. It all may be less than $500/month, that was kind of just an estimate.

[midwest07]

We have thought about this for my MIL but considered a duplex rather than a house so we could also rent the other side and then definitely cover the mortgage no matter what was happening with MIL because she probably couldn’t pay full rent. Maybe that’s an option if the 40k house isn’t.

[atarianna]

Do you think they would qualify to buy without you purchasing? I would probably explore other avenues to help them get on their feet before purchasing a home myself. It may come to that, but it wouldn’t be my first step.

If it’s a $40k home they may be able to get a HomePath Reno mortgage that builds some of the construction costs into the loan.

[krystee]

If your FIL is doing the work, will he expect anything in return? Who pays for the supplies/picks out the finishes/etc.? I would guess you, since you are the owner and the one profiting from the increase in value?

But if they have a track record of paying $1K for rent, I would think a bank would approve them for the $40K. If they could qualify for the mortgage but don't have a down payment, I'd rather gift them $2K for a 5% down payment for a conventional loan than I would take on a second mortgage.

[aprilsails]

My parents just did this for my Brother and his girlfriend. We all have a lot of concerns about it, but it looks as though my Stepdad is willing to take a loss if it comes to that in order to ensure my Brother doesn’t move back in with them again (he’s been living with my Mom and Stepdad on and off for 7 years).

[ssmjlm]

I guess the biggest question is, if they stop paying rent, can you afford to basically float them? Mortgage, utilities, upkeep?

My parents gave my sister their condo. She pays like 1 bill and it's ridiculous. But she's not well and they can afford it. Thankfully her name isn't on the condo itself.

[sandandsea]

I wouldn’t do it as it makes the relationship messy. The only way I would do it is to buy the house outright and let them live there as if they were a tenant(with no expectations of good tenants). Then You aren’t stuck with a mortgage if things go south. Treat it emotionally as a gift and expect when they move out your value will be less. Don’t expect favor with them or upgrades to the house because you are letting them live there. At $500 a month “rent” you are under the annual gift tax limit.

Or do it very legalistically and have a rent contract and a very clear discussion that this is a rental for you and if they are bad tenants you will find new ones. This stands to be messier relationally.

Basically either gift it or rent it but make sure several very clearly defined roles and responsibilities are discussed openly multiple times among all 4 adults in the picture.

[covergirl82]

MH (before we met/were dating) bought a double-wide trailer for his mom to eventually take over payments and then pay him back for part of time he was paying everything and she was living there. (And this was while he was working full-time and trying to finish college.) She never got a steady job and he ended up having to tell her to move out because he couldn't afford to pay the full mortgage and lot rent. He got a couple roommates and then sold it a few months before we got married.

MIL is notoriously terrible at money management. I feel that his heart was in the right place wanting to help her out, but it only ended up hurting him (financially) in the end. As of now, that whole experience is no longer a cloud on DH's and MIL's relationship, but she knows not to ask us for money.

I agree with others on having a very clear rental agreement outlined ahead of time that allows you to evict them for non-payment (or other reasons). Or, as some others have said, maybe gifting them with a down payment would be better.

[mmmomof2]

I would investigate the tax implications of this. When we had a rental property we had to check off on our taxes that the rent we were charging was market rent. There are tax benefits to having a rental property (either partially in the current year if your income is below a certain amount or as a loss carryforward that you can recognize when you sell), but if you are charging way below market rents it may make things complicated.

[dexteroni]

I would only do it if you can reasonably afford to make the mortgage payments yourself *and* won't be resentful if you end up doing just that. If you can, then yes, it's a very nice and generous thing to do. dr.girlfriend poses a very good list of questions to consider, and I would recommend doing some independent reading up on the topic as well.

[origami]

I would only do this if we could afford both mortgages. I'd WAY prefer buying a house for them over having them move in with me. No question about that. But this would get messy FAST, if you weren't willing and able to pay their living expenses for them. If you can do that, financially and emotionally, then I think it's a kind and generous thing to do for them.

[ECB]

Feb 23, 2018 15:56:32 GMT -5 origami said:

I would only do this if we could afford both mortgages. I'd WAY prefer buying a house for them over having them move in with me. No question about that. But this would get messy FAST, if you weren't willing and able to pay their living expenses for them. If you can do that, financially and emotionally, then I think it's a kind and generous thing to do for them.

This is somewhat where my biggest concerns would lie.  WHY are they in the situaiton they’re in?  Is it really just bad luck and they can’t get ahead?  And in turn, they’d see this for the opportunity it is and USE it to help and get their finances under control?

OR are they just bad with money?  And helping them out would actually result in them spending even MORE than they can or should and that even with a lower payment, they’d still be in dire straits??

Option A - generous and a great thing to do.  Option B- I strongly suspect you’d end up carrying 2 houses.  

And if you don’t know the answer to the above, then I’d want to sit down with them and talk to them about this, talk about their finances, and really try to suss out why they are in the spot they are in. Even to the degree of “We want to help but if we do, we need full access to your financials to determine what is actually affordable”.  

[lolalolalola]

Feb 23, 2018 16:33:28 GMT -5 ECB said:

Feb 23, 2018 15:56:32 GMT -5 origami said:

I would only do this if we could afford both mortgages. I'd WAY prefer buying a house for them over having them move in with me. No question about that. But this would get messy FAST, if you weren't willing and able to pay their living expenses for them. If you can do that, financially and emotionally, then I think it's a kind and generous thing to do for them.

This is somewhat where my biggest concerns would lie.  WHY are they in the situaiton they’re in?  Is it really just bad luck and they can’t get ahead?  And in turn, they’d see this for the opportunity it is and USE it to help and get their finances under control?

OR are they just bad with money?  And helping them out would actually result in them spending even MORE than they can or should and that even with a lower payment, they’d still be in dire straits??

Option A - generous and a great thing to do.  Option B- I strongly suspect you’d end up carrying 2 houses.  

And if you don’t know the answer to the above, then I’d want to sit down with them and talk to them about this, talk about their finances, and really try to suss out why they are in the spot they are in. Even to the degree of “We want to help but if we do, we need full access to your financials to determine what is actually affordable”.  

Absolutely agree with the the above. DH went through MIL’s budget with her to ensure she could afford the rent. She has since complained the rent is too high. DH sent her the budget spreadsheet and asked her to show him where things had changed. She has not responded to that and continues to pay the agreed upon rent, although she is usually late. We are charging market rent so if she can’t afford it we would have to find other ways to help her (like grocery gifts cards, etc) because we need to change market rent for tax purposes.

MIL is not a big spender whatsoever. She just has never made much money (worked PT low paying jobs).

[y4m]

We do this for my ILs. We bought the house and for tax purposes we treat it as our own second home (requires us to spend time there annually, which we would have anyway when visiting them). They pay below-market “rent” into an account they control but we can view. We use that account for any house maintenance as well, but otherwise we view it as a safety net account for them (they don’t know that). So basically the whole mortgage comes out of pocket for us, but we benefit from appreciation on the house and the knowledge that we’ve limited our exposure to their financial mess to $1k a month.

[dr.girlfriend]

Feb 23, 2018 15:56:32 GMT -5 origami said:

I would only do this if we could afford both mortgages. I'd WAY prefer buying a house for them over having them move in with me. No question about that. But this would get messy FAST, if you weren't willing and able to pay their living expenses for them. If you can do that, financially and emotionally, then I think it's a kind and generous thing to do for them.

Oh, yeah, I would point out that I would pay way more than $500 if it meant my MIL didn't have to live with me.  She has since passed away, but honestly when we were even in the same town continued exposure to her would have broken me and my husband up eventually, I believe (we were still just dating then, not even engaged).  I would see it as spending $500 a month I would be otherwise spending on marriage counseling!

[ECB]

Feb 24, 2018 23:53:53 GMT -5 dr.girlfriend said:

Feb 23, 2018 15:56:32 GMT -5 origami said:

I would only do this if we could afford both mortgages. I'd WAY prefer buying a house for them over having them move in with me. No question about that. But this would get messy FAST, if you weren't willing and able to pay their living expenses for them. If you can do that, financially and emotionally, then I think it's a kind and generous thing to do for them.

Oh, yeah, I would point out that I would pay way more than $500 if it meant my MIL didn't have to live with me.  She has since passed away, but honestly when we were even in the same town continued exposure to her would have broken me and my husband up eventually, I believe (we were still just dating then, not even engaged).  I would see it as spending $500 a month I would be otherwise spending on marriage counseling!

Luckily my FIL is in a good financial spot and I'm not worried about his future living arrangements, but yes... I've thought to myself about "what if". It would be a HUGE problem for him to ever come live with us. I'd do ANYTHING to avoid that!!