Buying a condo to rent to your kid?

[vafoodie]

What are the pros and cons? Our only daughter 29. She makes $69k in Richmond, Va. It’s time for her to get out of her apartment for so many reasons, the latest being that her roommate has to leave for mental health reasons.
My daughter’s options are to find another place to rent where she will pay almost twice as much as she is paying now for less space, but safety would be improved and that is important.
Option two is to try to buy a place. This has been on the horizon for her. She does not have a lot saved for a down payment, so we would help her.
Option three is for us to buy the condo and rent it to her. We have even considered the idea of the kind of it being a place where we could downsize to when the time comes for us to downsize and for her to upsize. I’m not sure what the tax advantages or disadvantages would be, and whether it would be better to take out a mortgage or buy it out right if we could.
I know a lot of parents do something like this especially when their kids are in college. I’d appreciate any sharing of your experiences with these kinds of situations.

 

[pb4uski]

What I am considering for 35yo DS is to fund the 20% down payment for him to buy a condo. Then he would pay the mortgage, property taxes, etc. When he sells, we would get 20% of the sales proceeds.

IOW, we would get 20% of the appreciation in lieu of interest.

In order for him to get a loan I think that we would have to sign off on it being a gift and have the 20% interest in the condo be a handshake agreement. If he renegs, then it would come out of his inheritance.

 

[street]

Not sure on the pros and cons of option 3 but that is a great idea. I think it is beneficial for her and you in a lot of ways. Your requirements and expectations oof how things will work can be worked out between the two of you.

A simple solution for a complex issue.

 

[Aerides]

What I am considering for 35yo DS is to fund the 20% down payment for him to buy a condo. Then he would pay the mortgage, property taxes, etc. When he sells, we would get 20% of the sales proceeds.

This is a good way to go, it's also less complicated for income/tax reporting.

Buying it and renting it would obligate the OP to document all that in taxes every year, even if the net result is a wash.

And for a 29 year old, it creates better independence vs. parents being the landlords, and knowing they want it eventually.

 

[jazz4cash]

We have similar situation but DD is at home and we’re a few miles North in the DC ($$$) market. Really, really tough for 1st timers here. Market has cooled but starter condos are still getting multiple offers. She has expanded her search to Baltimore suburbs. I really like the 20% solution proposed above.

 

[Alan]

What I am considering for 35yo DS is to fund the 20% down payment for him to buy a condo. Then he would pay the mortgage, property taxes, etc. When he sells, we would get 20% of the sales proceeds.

IOW, we would get 20% of the appreciation in lieu of interest.

In order for him to get a loan I think that we would have to sign off on it being a gift and have the 20% interest in the condo be a handshake agreement. If he renegs, then it would come out of his inheritance.

I like this approach particularly if you have other children as this seems to be fair, as it is a real estate investment for you as well.

 

[jrgators]

I'm in a similar situation with my daughter living in northern virginia. Was thinking of buying a starter condo and renting back to her. Only downside I see for me is that the down payment would be money I would be taking out of the market. Appreciation on a starter apartment wouldn't be that much.

 

[tulak]

I like this approach particularly if you have other children as this seems to be fair, as it is a real estate investment for you as well.

I like this approach as well.

In order to keep it fair between children, how would you handle the 20% down payment gift if you pass away and DS still owns the condo?

The other children would be out that 20% unless DS decides to take less from his share of the estate?

 

[pb4uski]

I like this approach as well.

In order to keep it fair between children, how would you handle the 20% down payment gift if you pass away and DS still owns the condo?

The other children would be out that 20% unless DS decides to take less from his share of the estate?

Good point. I think that I would just forgive it. We only have 2 heirs, DD and DS. We paid for 4 years of college for DD but DS decided not to attend college so far... and I suspect given he is 35yo that he never will even though we have a standing offer to pay for college should he chose to go.

My position has always been that we offered both of them college and one accepted the other declined, but there is no quid quo pro since DS declined. Interestingly, DD feels differently... that we somehow owe DS something since we paid for DD's college but nothing for DS since he chose not to go... so I don't think DD would have any problem with the loan being forgiven since "her share" of the loan would be about one year's worth of college.

 

[JDARNELL]

Richmond is a rough place
To start out in. Our son spent two years there after college and we helped with a little economic outpatient care to get him into a place that was somewhat safe. Now he is in DC and renting. We plan to help with the purchase of something when the time comes but are not sure what that is or when the time will come.

 

[tulak]

Good solution. It helps when siblings are reasonable.

It’s not easy to keep things balanced. I try with my kids, but it’s not going to be exact. DD’s college was more expensive than DS, but I’m letting DS live with me (mostly) rent free so he can save for a down payment.

Hopefully it balances out in the end. I don’t think either of my kids expect much and will likely be successful on their own, so that makes it easier.

And back to the topic, I’d be inclined to gift money to kids for a down payment and let them deal with the mortgage, etc. It’s their life and I want to minimize my involvement.

 

[Alan]

I like this approach as well.

In order to keep it fair between children, how would you handle the 20% down payment gift if you pass away and DS still owns the condo?

The other children would be out that 20% unless DS decides to take less from his share of the estate?

You could modify your will to extract that deposit going to DS.

You could put a sum equal to that deposit in a mutual fund and make the other child the beneficiary. Easy to change when circumstances change. It will never be exact as the value of the mutual fund will grow at a different rate to the appreciation of the condo.

ETA
This is similar to what we have done with our children. A few years ago we gifted money to DS to buy a house and have put the same amount of money in an account for DD to inherit.

 

[Dash man]

We allowed one son to move into one of our rentals and bought another townhouse for son #2 to move into with his family. It keeps all three grandkids close.
We don’t charge any rent, so no tax issues. In our trust each of them will get the home they’re in. If they choose to move before that, it’s on them.

 

[Texas Proud]

Remember that if you rent it out you can depreciate it on your tax return...


Just make sure you charge something close to market even if you have to gift some money to her to pay you...


You then can move in later in life and make it a homestead and get better tax treatment...

 

[gcgang]

Remember that if you rent it out you can depreciate it on your tax return...


Just make sure you charge something close to market even if you have to gift some money to her to pay you...


You then can move in later in life and make it a homestead and get better tax treatment...

+1.

Not sure of current tax laws, but my folks did a co-ownership thing with me back in the 80’s which allowed them not only to depreciate the unit, but could depreciate furnishings, expense several other things, and write off travel expenses when they visited, as I lived 1500 miles away.

 

[calmloki]

Think pb4uski has about the best cleanest plan. Kid can sell at a future point and avoid $250k in profit as a single. Can't do that with a rental. As far as financing, if a loan is taken out then the gift letter mentioned by pb4uski would be required by the bank (IMHO). Getting into renting it to the kid and depreciating for taxes gets into a whole bunch of tax hassle capital gains recapture/depreciation or re-purposing a rental appropriate to your daughter into your primary residence wise. Simple is good.

Sez the guy who is pretty convinced he doesn't want to play with 1031-ing his rentals into another rental in a tax-free state, then changing his primary and converting that rental (after 2 years) into his primary dwelling. Simple has much to recommend it.

 

[Carol1862]

I can tell you what we did.

Like you, our daughter was renting. We decided to buy a condo. We paid cash and my DD was responsible for all bills (HOA, taxes, insurance, electric) and we set up a payment plan with her so she’d own it in 20 years. Basically, we were the bank. She took in a roommate and that helped her pay bills plus her monthly “mortgage” to us.
Fast forward, my daughter got married and together they bought the condo from us. I gave my daughter the money that went to the principal of her payments.

Hope that made sense. I kept spreadsheets of every bill, every payment.
Our accountant made sure everything was done properly

 

[ivinsfan]

PB4...to keep your son level in the RE market wouldn't it be more fair to simply ask for repayment of the original loan plus some interest. This is simply a question and not an opinion..

 

[Texas Proud]

Think pb4uski has about the best cleanest plan. Kid can sell at a future point and avoid $250k in profit as a single. Can't do that with a rental. As far as financing, if a loan is taken out then the gift letter mentioned by pb4uski would be required by the bank (IMHO). Getting into renting it to the kid and depreciating for taxes gets into a whole bunch of tax hassle capital gains recapture/depreciation or re-purposing a rental appropriate to your daughter into your primary residence wise. Simple is good.

Sez the guy who is pretty convinced he doesn't want to play with 1031-ing his rentals into another rental in a tax-free state, then changing his primary and converting that rental (after 2 years) into his primary dwelling. Simple has much to recommend it.

I think it make a difference if there is a possibility for the parents to move in there later in life.. you can lock in a price now, rent it out, get tax breaks and have what you want when you do downsize... I do not see this a a problem...


Now, if there is no plan to ever move there pb4uski's plan is better... it is clean.. no payments etc. until sold.. if parents pass before they sell then they get a benefit... if you have more than one kid you might want to take this into account...

 

[vafoodie]

I can tell you what we did.

Like you, our daughter was renting. We decided to buy a condo. We paid cash and my DD was responsible for all bills (HOA, taxes, insurance, electric) and we set up a payment plan with her so she’d own it in 20 years. Basically, we were the bank. She took in a roommate and that helped her pay bills plus her monthly “mortgage” to us.
Fast forward, my daughter got married and together they bought the condo from us. I gave my daughter the money that went to the principal of her payments.

Hope that made sense. I kept spreadsheets of every bill, every payment.
Our accountant made sure everything was done properly

If we go this route, I will have more questions for you!

 

[pb4uski]

PB4...to keep your son level in the RE market wouldn't it be more fair to simply ask for repayment of the original loan plus some interest. This is simply a question and not an opinion..

It might. Actually when I chatted with him about it I said that he could pay the loan at any time with no interest and he quickly said with a wry grin... oh, so I could pay it off and with no interest and then sell it and cut you out... and I said, yeah, I guess that you could... clever kid.

I am trying to figure out how to best structure it so he could take advantage of the principal residence exemption and whatever I get in excess of my principal can be capital gains rather than ordinary income, but it isn't so imminent that I need to spend much time thinking about it.

I want to help him out but I don't want to be his landlord.

 

[tulak]

I want to help him out but I don't want to be his landlord.

This is why I like the idea of gifting the money with no requirement for payback. It’s an early gift from his inheritance. And to keep it fair, I like Alan’s suggestion of putting aside an equivalent amount invested that goes to the sibling.

Edit to add: this thread has motivated me to start tracking substantial amounts I give to DS/DD to keep it fair.

 

[Markola]

Personally, I’d gift DD the down payment for whatever she can qualify for on her own, no strings attached, and let that be the extent of the real estate help.

Life is hard and unpredictable and things have a way of going wrong, but being a landlord requires a willingness to kick a renter out on the street, regardless of the sob story. If I were DD I wouldn’t want even the hint of feeling controlled by my parents as an adult. If I were the parent, I would not want to be troubled if DD or a future partner or pets or whatnot result in some disrepair that I didn’t like. What about remodels? Are you the bank for those, too? In the case of a job loss, will you let a few months rent slide?

Yuck, I would not be a landlord for any relationship that I value. My .02.

 

[calmloki]

Personally, I’d gift DD the down payment for whatever she can qualify for on her own, no strings attached, and let that be the extent of the real estate help.

Life is hard and unpredictable and things have a way of going wrong, but being a landlord requires a willingness to kick a renter out on the street, regardless of the sob story. If I were DD I wouldn’t want even the hint of feeling controlled by my parents as an adult. If I were the parent, I would not want to be troubled if DD or a future partner or pets or whatnot result in some disrepair that I didn’t like. What about remodels? Are you the bank for those, too? In the case of a job loss, will you let a few months rent slide?

Yuck, I would not be a landlord for any relationship that I value. My .02.

Just so. Kid needs to be free of helicopter parent and responsible for themselves. Parent needs to be free of tending to an investment. Both win.

 

[Dash man]

Just so. Kid needs to be free of helicopter parent and responsible for themselves. Parent needs to be free of tending to an investment. Both win.

That’s why we don’t charge rent to our kids. They take care of the homes as if it is theirs, because it will be eventually. By leaving it to them as an inheritance, they get the step up in basis, and one won’t be saddled with depreciation recapture as he would be if we just gifted it to him and he eventually chose to sell it.