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How To Buy Investment Property With Your Family

By: Steve Goldman, CCIM

This week, my wife and I joint ventured with one of our daughters, helping her buy her first home and investment property, a duplex in Montrose, Colorado where she works.  My daughter gets a reduced-cost place to live, a young start on both real estate investing and establishing a stronger credit profile and we both increase our monthly income.

Ranch-style duplex under a blue sky

The duplex we bought with our daughter in Montrose, Co.

We were able to find a very nice duplex, only 10-years old, for around $280,000. It’s quite large with each side having 1,432 sq ft of living space, 3-bedrooms and a 2-car garage and a fenced backyard. The non-family tenant will pay $1,100 per month, $128 more than the $972 per month P&I (principal and interest) payment for the entire property.  There are other costs, of course, including property taxes, insurance and the property management fee on the tenant side so that my daughter doesn’t have to instantly learn the fine art of screening and dealing with tenants.  Still, our daughter’s monthly cost will be less than she paid to rent a much smaller house and we’ll all share in the other benefits, depreciation and property value appreciation.  And its hard to put a value on the other kind of appreciation, that of a daughter living in a safe and fine housing.

While she lives there, the actual monthly cash flow from our investment will be low. But someday when she moves (remember, she must occupy for at least a year) the income from a second full-pay tenant will increase the cash flow to more than $8,000 a year less any repairs, and all the while, our equity grows.

Helping a child buy a home is a controversial act for some. Some financial experts like Suze Orman advise strongly against it, saying, “Never cosign a loan. Once you have cosigned, you cannot get out of it–even on your deathbed.” Others, like authors Robert Kiyosaki and Sharon Lechter, who wrote the classic book Rich Dad, Poor Dad, say investing with your children is a great way to help them get a strong financial start in life.

In our case, the decision was easy because acquiring the property achieved several goals: She gets a great place to live as an owner/occupant in our joint venture, while the other tenant’s monthly rent covers more than the entire principal and interest payment.  We both get cash flow, equity build, depreciation benefits and we expect appreciation as rents continue to grow. And perhaps most importantly, I get to teach her all about investing, buying real estate, dealing with loans and repairs and how to create an ongoing second income from investment real estate.  She’s making money while she sleeps!

Young woman on ladder in kitchen

Our daughter, prepping her new duplex for move in

If you’re interested in helping your kids or other family members purchase an investment property, a 2-4 unit is a great way to start. Affordable and plentiful, they allow your family member to live in one side and rent out the other. And when they no longer need to live there, your returns grow!

One of the advantages of having your family member live on the property is that this allows them to get an advantageous homeowner’s residential mortgage instead of an investor’s commercial loan. Where most commercial loans today will be over 4%, will amortize over 20 years and balloon in five years, a residential mortgage like ours was 3.75% interest rate, fixed for 30 years with no balloon.  There are several requirements to meet, including that one of the borrowers has to live on the property for at least one year, so they have to be on the loan. Frequently, as in our case, the child isn’t able to qualify on their own, so we had to be co-borrowers but that also allows us to be joint venturers–partners on the income-investment property.

We learned a lot going through the “conforming” mortgage application, processing and underwriting process. Here’s a few tips from us, now a little battle-scarred:

  • Set a closing date far enough out to get the loan closed. It’s often not pleasant to have to beg the seller for a closing extension.
  • Set aside the cash-Early. Have 2 months of bank statements without any large deposits showing the 20-25% cash needed for the equity into that person’s account at the outset. Don’t think that you’ll sell some securities just before closing. The underwriter will ask for several months of bank statements and will want to see that cash in the child’s account (for their portion) and your account for at least two months prior to underwriting, not just closing.
  • Be a model applicant.  The paperwork needed to get a conforming loan closed is wild.  Turn the documents needed into PDFs and store copies in a separate loan folder on your PC. Every borrower has experienced being asked by the underwriter for the same documents two or more times.  Make it easy for you to just click and send (again) instead of trying to argue with them that you’ve sent it already.
  • Be patient, but not passive.  We had to stay actively interested and even mildly aggressive to ensure that our loan got through processing and underwriting. Even contacting the supervisors. but we never yelled, threatened or made derogatory comments about a person. We just said: “here are the facts; can you please help us.”
  • When closing comes, expect to sign an enormous amount of documents.

Though painful, in the end it was worth going through the process on so many levels. We feel so strongly about investing with our family that we’re already under contract on a duplex in Knoxville with another daughter.  In that case, it will strictly be an investment as she doesn’t need to live there. But again it achieves a goal for her that I wish I had achieved 30 years ago–to start investing in real estate in your 20’s.

If you’re interested in learning more about helping a member of your family buy an investment property, check out our multifamily property listings or contact me or Solange Velas, who specializes in multifamily properties of this size. We’d love to help you get started.

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