Home investment?

[craigmac3030]

My wife and I both 34 have been saving well for the past 11 years. We were both mil pilots and she recently separated to stay home and raise our 4 kids (6,5,3,1). I'm still a working major and plan to stay in 8 more yrs to get my retirement check.
Here's our financial situation
Liquid-$25k
529-$8k(both transferred post 9-11 gi bill to kids, which should cover 50% of college cost)
IRA's-$200k
Mutual funds/stocks-$685k
Home 1(worth~$200k) paid off. Rental 1 income $1200/mo
Home 2 (worth ~$240k) owe $219@3.25% 30 yr mortgage payment is $1500/mo
Rental 2 income $1800/mo
Home 3 which we live in (worth $460k) owe $420k@3.25% 30 yr
mortgage payment is $2500.
Post tax income from employment is $7500/mo.
No debt other than homes and credit cards that are paid off every month.

The question:
My in laws just recently moved from Michigan to California and due to a recent increase in disability pay are able to afford renting a home at $4,000/mo. They want to buy the home they have been renting(approx 1 mil) but only have about $150k to put down.
We have discussed putting 500k into the house with their 150k and then we would be the home owner's and they would pay us the $4k monthly rent and we would own the home.
Pros:
$150k in instant equity, reliable income from the home for approx 15 yrs (they are 67 and in good health and are meticulous cleaners i.e. home would be well cared for).

Cons: would have to sell 500k in funds generating about $150k, of taxable income. Most of our nest egg would be in real estate. I have a great relationship with them, but am still hesitant to mix business and family. We would have to take on more debt vs having that money grow in the market and generating yearly dividends.

I'm interested if anyone else has done anything like this and if there are any pitfalls I'm not aware of. In all likely hood we'll maintain our stats quo, but open to all inputs thanks!


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[ivinsfan]

You already have a lot of real estate another 550K would really skew your AA. You would pay a tax on 150K of income to "help" your in laws, you probably need to be thinking about your young children and not their grandparents.

And B...why do you in-laws need a million dollar house, you don't have one.

What happens if an in law dies and the other one remarries then the new spouse is in your "jointly" owned home. What happens if you and your missus go your separate ways and suddenly they are your ex-in-laws?

I know it's California but encourage your in-laws to either keep renting or find something they can pay for with their own money. You have done a great job of saving and investing don't get off track now, remember you are a one income family at this point.

Thank you for your service....

 

[pb4uski]

Bad idea for many reasons. Mixing business and family. Tax on liquifying your investments to invest in this deal. Overconcentrated in real estate. Etc.

The reality is that it sounds like your in-laws can't afford to live buy a $1 million house. The sooner they get used to it the better. The rent is a pretty good deal.... only slightly more than mortgage payments on a $1 million home with 20% down at 4% would be... not to mention the cost of insurance and property taxes.

 

[Rustic23]

Never did anything like that, but did lend money to a daughter. NEVER again. There is a reason they say that! It's not that they don't pay you back, but it changes the relationship. No matter how much you think it won't it does.

How does the disability work? Both disabled? If the disabled one dies does it end? If so is there monies to still pay the rent?

Edit: My point is: Can they afford it on one income? Are you willing to take up the slack? If not what will forcing the remaining partner to vacate cause strife in your family?

I also agree with 'Why a million dollar house, when you don't live in one?' My sister wanted me to lend her money to buy a car. She wanted a car that was 30% more than what we drove. I told her such....... she has not spoken to me since!

 

[Dash man]

I agree it's a bad idea. They may take immaculate care if the house now, but they are aging and may not continue. We're trying to sell my in laws house now after moving them into an independent living facility. The house needs lots of work even though he tried to keep it up and is a retired construction superintendent. Too many things can go wrong, so I'd avoid the situation.


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[Bamaman]

Bad idea for many reasons. Mixing business and family. Tax on liquifying your investments to invest in this deal. Overconcentrated in real estate. Etc.

The reality is that it sounds like your in-laws can't afford to live buy a $1 million house. The sooner they get used to it the better. The rent is a pretty good deal.... only slightly more than mortgage payments on a $1 million home with 20% down at 4% would be... not to mention the cost of insurance and property taxes.

I agree wholeheartedly about not mixing business with family. Everyone needs to stand on their own two feet--especially at age 67. And California is not the best place to try to live on in retirement without really big money in the bank.

You've got enough overhead hanging over your head with your wife no longer working. You're on a good path but you're still young. By the time your kids get college age, I'd hate to think what its going to cost to fund college.

 

[craigmac3030]

Thanks for all the advice, I knew it wasn't a great deal but getting some validation is always nice, and some times the best deal is the one you don't make.


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[FI by 2024]

I just wanted to put in a plug for family: while it can go wrong, in my case my brother and his family were perfect tenants. Paid rent a couple days early every month, fixed everything on their own (usually didn't even tell me a toilet or smoke detector was broken until they'd replaced it), good at yard maintenance, etc. So the family issue is not what would cause me concern here. The taxes and AA...that's what raised my hackles.

Good luck! I'm impressed by your current status; mil-to-mil with kids is hard enough, add in two pilots and most of my friends would be spending every penny and saying they deserve it because of how hard their life is. You've done a good job.


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[ivinsfan]

I just wanted to put in a plug for family: while it can go wrong, in my case my brother and his family were perfect tenants. Paid rent a couple days early every month, fixed everything on their own (usually didn't even tell me a toilet or smoke detector was broken until they'd replaced it), good at yard maintenance, etc. So the family issue is not what would cause me concern here. The taxes and AA...that's what raised my hackles.

Good luck! I'm impressed by your current status; mil-to-mil with kids is hard enough, add in two pilots and most of my friends would be spending every penny and saying they deserve it because of how hard their life is. You've done a good job.


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The in-laws were not going to be tenants, they were going to be co-owners, which is very different. Even with family you can remove a problem tenant.

 

[FI by 2024]

The in-laws were not going to be tenants, they were going to be co-owners, which is very different. Even with family you can remove a problem tenant.

Actually Craig said he and his wife would be the homeowners and the parents would pay rent. But even if that were not true, I'm not sure how you got to "problem tenant" from my post? My post didn't discuss removing tenants at all, I was just pointing out that mixing business with family and having family as tenants is not always bad. Multiple previous posts offered examples of the negative aspects, so I was offering the other side.


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[craigmac3030]

Yea we would be the homeowners and inherit their down payment of 150k, then they would pay rent directly to us. The 150k of "free" equity is what makes it interesting to me.


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