Home Ownership - Equity Share? How?

[Emission]

My wife and I want to help some relatives buy their first home.

We'd like to "invest" in their home purchase, and pull out equity when they sell (in five years or so).

How is this done? Do we pay a percentage of the down? A percentage of the tax? HOA fees? How do we recover our investment?

[RANDY P]

Lien the property - offer to give them the down payment they need and have escrow write a promissory note. Put yourself in last position with a balance declared. Make sure there is a baloon provision in there to force payment if something happens.

You don't have to actually excecute the terms of the note, in fact you can always forgive the note down the road if you want.

EDIT: Just be careful - in the event they want to refi the property, the lender will want to see payments have been made on the loan you hold, if in fact the note has provisions for monthly payment. If you can't produce proof of payment through cancelled checks or a letter from an actual escrow company stating payment, any lender will consider YOUR loan defaulted - even though you may have an informal agreement saying he doesn't need to follow the terms of the note. Perhaps writing it as a fixed amount due vs. monthly payments would be the best way to go. Consult a local expert about this.

This allso prevents them from overspending down the road through cash out refi's - in the event they get hungry you get paid off.

[Emission]

Yes, of course it will be a legal contract!

My question is how do we (wife and I) make money?

Say the house is $500,000:

Down payment (10%) - $50,000
Monthly Mortgage - $3,000
Monthly HOA - $300

So, if we choose to "split" the house, and each put up 1/2 the down ($25,000 each), and 1/2 the mortgage ($1500), and 1/2 the HOA ($150).... seems fair... until... they live there...

We are both shelling out $1650/month, and they live there, they are getting a better deal. So, I "charge" them rent?

[RANDY P]

Off the top of my head, setting up an LLC, with an agreed upon appropiate split on the monthly payments. On sale of home whatever equity is left is divided based on the LLC.

Safest way I know of.

[turbo6bar]

Be careful about renting or investing with friends or relatives.

So, if we choose to "split" the house, and each put up 1/2 the down ($25,000 each), and 1/2 the mortgage ($1500), and 1/2 the HOA ($150).... seems fair... until... they live there...

We are both shelling out $1650/month, and they live there, they are getting a better deal. So, I "charge" them rent?

The answer is that which both parties agree. There is no guideline or rule.

I don't think you should pay for the mortgage (part or all). Why not keep it simple? If you put a down payment, agree to a net return on the down payment. If you put down $25k, ask for an annualized return of 8%, 10%, 18.99%, or whatever floats your boat. Just be aware that if all he!! breask loose, you may very well lose your entire investment, even if the he!! is brought by the relatives.

In my opinion, your plan is bordering on speculation. Basically, your investment is dependent on appreciation to cover the monthly interest payments.

[jrdavid68]

As stated above, do what's necessary to make it legal and make sure that your a$$ is covered.

I know someone who has done this where he has put up the entire down payment. At some agreed upon point in the future, the house is appraised at which time the down payment and some percentage of the increased equity is paid to the person who fronted the down. The owners would most likely re-finance at that point taking some of the equity out to pay the "friend".

Given some of the statements above, I probably have that over simplified, and possibly even wrong. I am not a finance person nor do I play one on TV.

[MikeSid]

In short...yes...you charge them rent.

[Moneyguy1]

Buy the property in your name.

Rent it to them with an option to buy after an agreed upon length of time. Allow them to use part of the rent toward the down payment.

At the agreed upon point, factor in a portion of the inflated value in the sale price.
All of this in a written and signed contract.

Just an idea. THis way, you are covered.

[Emission]

I have an appointment with a Real Estate Attorney in the morning. I'll post what he suggests...

[Tishabet]

There is actually a company that specializes in setting up this type of situation. Check out
http://www.circlelending.com
and look at their mortgage products.
The suggestions above are correct, but you'll save yourself a lot of time, hassle etc by going with CL.