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My retired mother is thinking about purchasing an investment property for use by a family member that has fallen on hard times. (Yes, I know what you're thinking but she wants to do it) She spoke to a local, small town bank and they recommended getting a HELOC on her lien-free primary residence.
She really wasn't looking for a lien on her primary but was told the fees + rates were so high right right now on Non-owner Occupieds that a HELOC was the least expensive option. I only know the basics about HELOC's. My main concern is the variable rate would eventually outweigh any savings from origination fees.
Other concerns/considerations:
Taxes, but a friend of hers said it'll only be a little more complicated due to the addition of a Schedule E.
Mortgage would be less than $100k so the rate will probably take a hit.
Down payment of 25-30%, strong borrower, good assets
Investment property will be a fixer-upper
What do you think, HELOC or cash-out refi on her primary? If HELOC, what should she expect as far as rates & fees?
My mother is paying most of this family members rent lately. Instead of it going to an apartment complex she thinks it would be better to get some benefit from her "charitable" contributions.
The family member will probably pay a few months but I expect most payments will be in the form of sweat-equity, hence the fixer-upper.
That being said, thoughts on the HELOC v Cash-out?
That being said, thoughts on the HELOC v Cash-out?
Neither. Do it as a straight up mortgage.*
As an investor you NEVER put your own home at risk.
Leverage the begeebus out of the income property but NEVER risk your own home.
If the rents won't carry the costs then you're paying too much... find another property.
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* in this case I'd say not to do this either. These things never turn out well.
If Mom insists on doing *something* to help this person...
she would be better off making a tax exempt gift to help pay their rent with for a year or two.
Often this is a result of drug use. If so, this could be a major headache and not really help the person.
She can hire him/her to do repairs around her house. If that works out, find needy people and donate money for repairs on their houses. Someone will notice this and hire the guy for their own odd jobs.
Neither. Do it as a straight up mortgage.*
As an investor you NEVER put your own home at risk.
Leverage the begeebus out of the income property but NEVER risk your own home.
If the rents won't carry the costs then you're paying too much... find another property.
---
* in this case I'd say not to do this either. These things never turn out well.
If Mom insists on doing *something* to help this person...
she would be better off making a tax exempt gift to help pay their rent with for a year or two.
Agreed.
Debt against a primary should be to buy or improve the primary.
Yes, she should have given him a gift several years ago but instead has been spotting him funds a little bit at a time hoping things would improve. We are both familiar with the "gifting" process. I'll remind her of this option. Hopefully this will be enough to make her feel satisfied she's done something significant (doubt it)
No, this person isn't involved in drugs. Just wasn't blessed with a good IQ and struggles with life decisions. Huge heart, though. And yes, every repair in her house and mine has been completed in repayment for funds loaned. It was a win-win for a while, now not so much.
I believe one of the concerns with going for a NOO mortgage is a fixer-upper qualifying. She's seen several properties that might work but say "cash only", ie, no functioning kitchen, bath or some other major issue. Which, again, wouldn't be an issue since the renter has the skills to renovate and my mother has funds to buy the supplies.
I wonder if this small town back offers HELOCs on NOO? Hmmm....sound like it might be option if the NOO mortgage thing doesn't fly.
Thanks for all the info so far, I've passed it on to her for consideration.
No, this person isn't involved in drugs.
Just wasn't blessed with a good IQ and struggles with life decisions.
This is a very different set of circumstances than the OP implied.
("for use by a family member that has fallen on hard times")
In this instance Mom might establish a special needs trust of some sort for this person...
that is if Mom has enough assets to spare to provide meaningful assistance.
But if Mom can't afford to do so without putting her own solvency at risk...
then Mom is left to help this low IQ person get OTHER assistance in some other way.
Quote:
Anymore comments would be appreciated.
Charity begins at home.
But that requires the generous party (Mom in this case) to have a home.
I'll reiterate: Mom should NEVER put her own home at risk.
Oh geez, I see my mistake. No, this person isn't special needs. I just meant not very smart.
After the comments here I'm going to steer her towards not purchasing a property. If that doesn't work I'll make sure she pays the little extra in rate & fees to have the mortgage on the investment property.
The rates right now are excellent and the difference between a primary and a non owner property is very slight (maybe about .250% or .375%).
Have her buy this property and put a loan on this property.
Don't have her put her primary at risk.
PS - A non-owner property will also be a write off. Have her check with her CPA.
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From a mortgage broker in Florida
