Parents and Grand-parents often ask the best way to help their children or grand-children with housing. Some elect to co-sign a loan, but then their credit and obligation can be tied for up to 30 years, or until the home is sold. Some parents provide a gift for the child to use as a down payment. Another way to help is to become a real estate investor and purchase the home directly.
There is a shortage of rental property in the Chisago Lakes area, so finding a renter for investment property is easy. The rate of return on your investment should be higher than putting your money in the bank, and less volatile than putting your money in the stock market. If there is a real estate market crash, rental properties are in higher demand, because it can become more difficult to buy or sell real estate.
If you purchase a $165,000 home in Lindstrom with taxes of $2,000 per year (real listing), put 25% down and get a loan at 5% interest, your monthly payment would be about $1000 per month (includes principle, interest, taxes, and insurance. According to Zillow this 4-bedroom, 1 bath home could rent for $1,400 per month. The renter pays their own utilities. The annual cash flow before any maintenance, is $4,800 per year.
If you paid cash for the home and rented it out, your annual cash flow is $16,800 per year, before maintenance expenses.
You can also sell the home to your child with a contract for deed. I have had several parents contact me because their daughter or son got divorced and they needed housing for their child and grand-children. Divorce can create credit and financial problems that prevent buyers from qualifying for a home, and many apartments aren’t large enough.
If you sold the same $165,000 home on a contract for deed at 5% interest with no down-payment, the monthly payment would be about $1200 (including principle, interest, taxes, and insurance). Some parents charge a higher interest rate or raise the purchase price. In this scenario the child can purchase a home for a lower monthly payment than if renting the same home, and you receive $14,400 annual cash flow. The buyer (son or daughter) is responsible for utilities and maintenance.
Real estate investments have other tax advantages, but you also pay taxes on your income, as you do with interest earned at the bank or other investments. Your tax consultant can inform you of the tax benefits you would receive and if you can make real estate part of your IRA. An experienced real estate agent can help you identify the right property to help you maximize your investment.
Ask the Real Estate Agent is a weekly column by Cheryl Kempenich of Coldwell Banker Burnet, who lives and offices in the Chisago Lakes Area. Submit your questions to firstname.lastname@example.org. All information is deemed reliable but not guaranteed. For legal assistance consult an attorney.