I was recently approached by two friends (let’s call them Celeste and Mary) for some advice on buying a home, and I found the situation interesting enough that I wanted to share it with you.
Celeste and Mary are sisters. Now in their 30’s, they want to find a way to give back to their mother Gloria, who is closing in on her 70th birthday and rents a room in a home. Gloria lives primarily off of her social security benefits and has never owned a home.
The three ladies are wondering if they contribute jointly, could they purchase a home with a low enough monthly payment that Gloria could afford to pay the mortgage. Gloria’s brother, a handyman, might move in to this new home as well, helping to offset the mortgage payments and help with repairs around the house.
Here are some of the questions posed, and the advice that I shared. Of course, your situation might be entirely different, but my feedback might be something you’d want to consider as well.
What Should They Look For In A Property?
My recommendation is to look for a single family home, in need of a little fixing up. A mobile home, in particular one where they do not own the land, wouldn’t be a good investment. Typically the home itself depreciates, and the land appreciates. A townhome is an option, but it would prevent them from converting a garage into an Accessory Dwelling Unit which could be rented for additional income.
In my opinion, the best option would be a single family home with a detached garage, on a relatively large lot. To keep her taxes down, she should aim for a home as inexpensive as possible, being mindful of the repair / upgrade costs. With family and friends who are handy, she can fix up the home over time into something that might be very livable. All work, when required, should be permitted by the city.
I would look for a home in an up and coming part of town. Since she is over the age of 65, I’d recommend a single story home.
Who Should Purchase The Home?
Celeste, Mary, and Gloria think that they should all purchase the home together. But I pointed out that when Gloria passes away (as we all will do), that the property might be subject to a step up in property taxes as the title transfers from Celeste, Mary, and Gloria to just Celeste and Mary. Celeste and Mary are Gloria’s only children, and as such the likely beneficiaries in the event of Gloria’s passing.
A better option would be for Celeste and Mary to purchase the home, and then rent it back to Gloria at a reduced rate. In this scenario, Celeste and Mary should craft an investor agreement, and think about putting the home into an LLC to further protect their investment.
Celeste and Mary will have the added benefit of maximizing the tax deductions and depreciation on the home, which is something that Gloria, with a limited income, wouldn’t be able to fully capitalize upon.
How Much Of A Downpayment Should They Put Down?
Their first inclination would be to put as much money down as possible to make the mortgage manageable given Gloria’s limited income.
But given that mortgage rates are amazingly low, and as first time home owners they qualify for very low rates, I recommend that they only put down 20% towards a 30 year fixed mortgage. This will help them avoid PMI, and allow them to maximize the buying power of their money.
There are a lot of things to consider when buying a home – and certainly Celeste, Mary, and Gloria will have more questions. But I found the exercise exciting, especially because it allowed me to test my real estate investment deal analysis skills against a real life scenario. Who knows, I might just end up purchasing a home as well !