Unique Housing Situation

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SteveKnox6
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Unique Housing Situation

Post by SteveKnox6 » Tue Mar 20, 2018 5:37 am

I had a random thought about a unique situation I am in and thought what better place to ask for advice and opinions.

My wife and I are 27 years old, currently living in the upstairs apartment at her parents' house completely rent-free. We are both maxing out our 401k's and Roth IRA's, our employers don't offer an HSA plan. We recently paid off her $120k worth of student loans from money I had saved, which was intended as a down payment on a future house. On top of this, we are still currently able to save an additional $4,500 to $5,000 per month which is being put aside for potential real estate investments as well as being placed in taxable accounts. We already have our emergency fund set up and fully funded.

My father has offered to sell me my childhood house at a discounted price from market value utilizing a gift of equity. This enables us to move in with virtually no closing costs and utilize that cost differential as our down payment so PMI can be avoided. (House is worth approximately $500k-$525k) Problem is, he won't be selling us the house for another 2 years or so when he retires. With the current rising home prices and interest rates a thought came to my mind, should I just "buy" the house from him now? I would lock in the historically low interest rates and pay the mortgage while he remained in the house for the next 2 years. He would still pay the property taxes and any related expenses. I'm very much on the fence about this but figured why not ask a community of people whom I trust.

Thanks all

AlohaJoe
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Re: Unique Housing Situation

Post by AlohaJoe » Tue Mar 20, 2018 5:47 am

A lot can change over 2 years. Housing prices could crash. Interest rates could go negative. You could decide you'd rather work for an NGO in Africa.

I can't imagine buying a house I'm not even going to live in for (at least) 2 years just because of FOMO about macroeconomic things nobody actually knows anything about.

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jfn111
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Re: Unique Housing Situation

Post by jfn111 » Tue Mar 20, 2018 5:56 am

I'll skip all the warnings of doing business with family. :happy
When you apply for the loan they are going to ask you if this will be your primary residence. I'm not sure your going to get the best rate if you tell them your basically doing a lease back to your dad for 2 years. Also, banks like to see you having some "skin in the game". I'm not sure if the bank will be excited about giving you a $400,000+ loan, with nothing down, on a property you won't immediately live in.

denovo
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Re: Unique Housing Situation

Post by denovo » Tue Mar 20, 2018 6:01 am

jfn111 wrote:
Tue Mar 20, 2018 5:56 am
I'll skip all the warnings of doing business with family. :happy
When you apply for the loan they are going to ask you if this will be your primary residence. I'm not sure your going to get the best rate if you tell them your basically doing a lease back to your dad for 2 years. Also, banks like to see you having some "skin in the game". I'm not sure if the bank will be excited about giving you a $400,000+ loan, with nothing down, on a property you won't immediately live in.

Took the words out of my mouth. I guess OP hasn't gone through underwriting, but they are generally very diligent these days in my experience, a reaction to the issues that preceded the financial crisis.
"Don't trust everything you read on the Internet"- Abraham Lincoln

chevca
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Re: Unique Housing Situation

Post by chevca » Tue Mar 20, 2018 6:40 am

Do you and your wife really want to live in your childhood home, or is this just attractive because of the "discount" part of it?

A lot can change in two years... your wants and needs, the housing market, job change, and so on. I would not lock yourself into anything now. And as mentioned, it may be tough to pull of the way you're planning on anyway.

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Watty
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Re: Unique Housing Situation

Post by Watty » Tue Mar 20, 2018 7:21 am

Along with a bunch the other problems the numbers also don't work very well.

In very rough numbers with a $400K mortgage at 4% you would be paying $16K a year in interest for two years for $32K.

If it was an investment property then on your taxes you could deduct depreciation each year too. This is because as the house gets older things like the roof, furnace, carpets, appliances, HVAC, etc would get older and be closer to needing to be replaced. This is a very real cost which would add to your carrying costs.

If there are property tax savings for owner occupied housing that you dad gets then that may be lost too.

stan1
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Re: Unique Housing Situation

Post by stan1 » Tue Mar 20, 2018 7:59 am

Could your dad live upstairs in your in-laws house for 2 years?

Maybe this is an accurate description of what you would do? You could make the house your primary residence immediately. Change your address to the house, put the utilities in your name, draw up some plans for how the house needs to be fixed up for your family, start the work, and start moving in over the next two years but spend most of your time at the apartment while the house gets "fixed up. Let your dad live in the house sharing expenses while helping with some of the "fix up" work. Your dad would not pay the property taxes and utilities he would gift you an equal amount each year while he lives there. That's just family members cohabitating and I'd guess many people on this board have a parent or adult child living in their home with no impact to a lender or taxing authority.

No one is talking about starting a business renting out residential real estate so don't use business terms like "rent" or "lease" for family cohabitation. The IRS does not care if your father lives in a house you own or if you live in a spare room at your inlaws house and does not require anyone to start a business renting out a house or a room because a parent or child is living at home. The bank does not care if you spend a lot of time at your inlaws. The IRS does care if you try to do business things like depreciate the property or deduct improvement and maintenance expenses without declaring rental income.

Someone will say this is mortgage fraud and tax evasion; I would take the position that family members cohabitating is not fraud or tax evasion. Completely different story if you are starting a business to rent out a house. People buy a house and fix it up before moving in all the time. Intent does matter. Consult your accountant if you wish, and seek a second opinion if you don't like the answer.

Main thing is whether you really want the house or not. Your family knows it. Is the location exactly what you want? Is it well maintained? Will it meet your needs for the number of children you might plan to have? I would not buy it just because your dad owns it or because you grew up in it. Look at it objectively.

harrychan
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Re: Unique Housing Situation

Post by harrychan » Tue Mar 20, 2018 8:42 am

I like your thought process. You essentially buy then rent back the childhood home back to your father. Sounds solid but I would make sure your in laws are ok with you two continuing to live rent free or else you end up paying mortgage and rent.
This is not legal or certified financial advice but you know that already.

SteveKnox6
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Re: Unique Housing Situation

Post by SteveKnox6 » Tue Mar 20, 2018 9:16 am

Really appreciate all of the input as usual. The house is appealing to us for many reasons aside from the discount, close to great schools andtransportation, size and amenities.

Underwriting could be a problem as I will not be occupying the house, but the skin in the game will be the 100k or so of equity that will be built into the mortgage. With that being said I have not formally undergone the underwriting process so valid points to consider.

The first post definitely speaks the most to me as while I may be getting in before higher interest rates strike, who knows what the value of the property will be in two years. Let alone what my family may be doing in two years.

This was just an initial thought as a way to lock in low interest rates but there are many other factors to consider as well. I most likely won’t be going through with this plan but wanted some mental exercise this morning and any additional input or thoughts are always welcome.

Great feedback so far

Jack FFR1846
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Re: Unique Housing Situation

Post by Jack FFR1846 » Tue Mar 20, 2018 9:28 am

Your current situation is more than ideal. You can continue to front load your retirement savings and save up a good chunk towards a house. Leaving things as they are now, you still have flexibility. If your dad decides he'll just stay here afterall.....or realizes he can't afford to retire.....or realizes he can't give you a discount and actually pay off the mortgage, it doesn't leave you in a bind. I'm just thinking.....no mortgage....no kids. Yah, I remember the "before-time".
Bogle: Smart Beta is stupid

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