Is a “Home for the Holidays” on your Christmas list? I once had a client who every year for about ten years bought a small “fixer upper” home for his investment portfolio. These were small starter homes, 1000-2000 square feet, purchased with small down payments. In many cases purchased with low or no down and seller financing.
This investor had several investments objectives in mind as he implemented his investment strategy: he wanted the rents to cover his expenses and mortgage payments. He wanted the complete bundle of tax benefits that were available to him. His chief objective was to provide an opportunity to have housing for his children when they were ready.
Over the years, with these objectives in mind, our investor accumulated several small homes. As the children were married and earned the ability to buy a home, our investor let them choose from a half dozen houses he was renting out. The appreciation that occurred through the economic conditions over the years was shared 50/50 with the child who purchased that home. The shared equity was sufficient to provide the necessary down payment to obtain a new purchase loan. The mortgage lender—the parent—viewed his 50% as a gift to the borrower.
Through this mechanism our investor got a good return on his investment, even after paying the capital gains taxes on the sale. The child got a home well below market value and had a good start on building up additional equity to acquire a newer home in the future.
Our investor viewed this investment plan as a way to help his children get into their first home and to further his investment goals towards retirement. This would be an early inheritance for his children. They could use the money better now than when he was gone.
It gave them the pride of ownership and the stability that home ownership provides in rearing families. These children no longer live in the original homes they purchased from their parents. Selling these first homes, they invested their 50% equity in a larger newer home that better fit the needs of their growing families.
This investment idea isn’t for everyone. It is certainly worth thinking about as you prepare your Christmas list for this year. Until next week keep smiling. Email your questions to email@example.com