Seeking Advice About Mortgages Rentals Land Contract and Such

[owrstrich]

i have a lifelong friend... truly a friend... i know who my friends are... elementary school... middle school... high school... and the 30 years after high school...  you get the idea...


he was successful in residential real estate sales and mortgage sales...  about 10 years ago he got married and had twins and then his wife morphed into a completely different person and turned all evil and all...


they divorced and he sold all worldly possessions and he ended up broke and a broken man... worried for his children he bought a house in a good neighborhood and in a good school system specifically for his exwife so his children could live safely...


by the time he got around to planting himself... it was too late to secure his own mortgage on his own place... his divorce and bankruptcy caught up with him and is still hanging over him today...


with houses selling and mortgages closing he was good with cash flow... so his dad bought a house and he signed a land contract for the house... this way it was his house but in his dads name... that was about 6 years ago...


he put lots of cash into this old stone house in a sleepy neighborhood on the south side of indianapolis...  he installed a swimming pool and completely modernized the place it is super nice now...


so... to this point... i have the past all set up for you... now oh but... oh the future...


very soon... his dad... will no longer a viable owner of this house... his dad is going to be forced to sell which means my friend will lose everything all over again...


i was thinking out loud and told him i should take a look at buying his house then he could stay there and pay me rent... he was ok with that... then his brain kicked in and he pitched this scenario...  i buy out his dads mortgage... the payoff will be very close to the current appraised value... then sell it to my friend on land contract like he was doing with his dad...


i was thinking a rental investment property... he was thinking a land contract...


im starting my due diligence...  i would do this locally but im 100% travel... i have read all kinds of stuff on the internet...now im looking to the folks here for some help in getting some preliminary investigation out of the way...


1st... i have never owned a house or real estate before... i have lived in rentals my entire life... i dont know the details of how it all works...
2nd... i plan on buying a house in approximately 10 years... when we stop doing this job and settle into something else...
3rd... im concerned to have the risk... i think i will get the benefit if its a rental... i dont know about the benefit if its a land contract...
4th... im concerned with taxes... insurance... liability... capitol gains... having this existing mortgage when i buy for myself in 10 years...
5th... to preserve our friendship... should i stay away from this situation...


so... any of you wise folks have any suggestions... i want to get a list of things to think about... i want to have my chickens in a row if this thing looks like its going to move forward...


thanks...

owrstrich

[Consiglieri]

O: the most important advice I can give you is to seek out an attorney in Indianapolis to assist with the legal issues.  Each state has its own nuances and general legal advice (such as that you find on the internet) may be inappropriate for your venue.

There is risk in your friend's plan.  He is essentially asking to use your money, over time, to buy the place.  The plan will tie up your funds that might otherwise be used to purchase rental property that might be sold (hopefully with significant appreciation) at the time you are ready to retire, the time you want to buy your own home.  While I am not an accountant and know little about tax, the appreciation on another rental property may qualify you for a 1031 tax free exchange; an installment sale contemplated by your friend probably will not.  Plus, given your friend's financial history, there is a risk that he may default, forcing you to make tough choices about what you need to do.  I wouldn't want to face that choice.

Another idea is to buy the property outright, rent to him for the time being, and give him an option to purchase or a right of first refusal. 

I need to think about the other issues and will PM you.

[Wildcat]

O - This situation could become sticky indeed considering your plans for 10 years from now.  Unless you have cash on hand to purchase outright and then have him to sign a mortgage (and other documents) so that you are the holder, I would seriously consider your thought number 5.  There is too much to lose here (friendship and your future plans).

[La Quinta]

Hey O...PM me your phone number and I'll call ya (if ya want)...having spent 21 years in homebuilding and now a proud "slum lord (as my husband and I joke)" ...it would take me two days to answer your questions in print...trust me...we learned a lot when we rented our SC home to friends! It's still good but a learning curve for sure...I'm here for ya if you want advice...

[owrstrich]

ok...