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My parents are retired and in their 70's. They have a nice bungalow in a nice retirement community that is probably worth $400k. Although they have a few bucks put away, my Dad was never good at really planning for retirement and subsequently they are living with less disposable income than they would like. The good news is they are healthy, happy and very active.

One idea I have is to buy their home from them now and they stay in it as tenants. Lets say I pay $400k for it and put down $80k and mortgage $320k with a long amortization. Then ask them to pay rent that exactly equals my payment. We get a legal document saying they can never be evicted during their lifetime (just for peace of mind).

This seems like a win-win for both parties and I have the money to do it and having a "tenant" that I know also seems like a good idea. In 20 years they house is paid for and worth maybe $600k.

What are the downsides to this? Has anyone done this or heard of others doing this? My siblings and I do not need any inheritance and often tell my parents not to worry about leaving anything to us. They gave us all a great start in life and we are all pretty successful. This would free up some money so they could travel a little more in the winter while they are still healthy enough to enjoy it. If one of them were to pass away the other could stay in the home or move to a condo. They could take $300k of the money into into buying an annuity or something that generates a monthy income and spend the other $100k on fun stuff over the next 7-10 years.

Any comments appreciated!!
 

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Interesting idea. I actually started a very similar thread recently. Do a search for my old posts and you will see what was discussed. Not precisely your situation I realize, but I think you'll enjoy the valuable insight provided by those who responded to my many questions. In short, this is not as simple as you think. Read the thread. :)
 

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Your heart's in the right place, but I think your idea is unwise.

First, there is no guarantee that the home will be worth $600,000 in 20 years. It could be more or less. There's no guarantee that the home will increase by the amount that you expect. Also, have you worked out the return? To grow $400,000 to $600,000 over 20 years requires a return of only 2% (just over 2%). Don't forget that you'll be taxed on the capital gain as well. After all, it's not your principal residence. Also, don't forget that you'll have to pay property taxes. After you account for taxes, you'll earn less than 2% per year - perhaps substantially less.

Second, there's no guarantee that your parents will still be in that home 20 years from now. If they are in their 70s now, then they would have to be alive and well in their 90s. Even if they are alive (and I wish them long life) they may not be healthy enough to stay in that home. Even if they are healthy enough, they may want to move to a retirement/adult condo for lifestyle reasons.

If you have the income to buy their home, you may be able to help them in other ways. For example, do they have TFSAs? If not, then you can simply give them the money to invest. Both parents can have $5,000 invested per year for a total of $20,000 ($5,000 X 2 X 2years). If they invest conservatively, say a bond ETF, they could make ~ 4% (about $800 on $20,000). If they invest more aggressively, say a REIT paying 8%, they could get ~ $1,600 tax-free per year - enough to improve their lifestyle. I'm sure others will have a lot of ideas as well.
 

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I was under the impression the OP was thinking of having their parents pay all the expenses on the home. Essentially freeing up their equity in the home for other things.

Doesn't sound horrible to me but of course there could be many factors that need to be considered as well.

I'm sure there are also other options that you parents can use to get some of the equity from their home back into their pockets.
 

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This sounds like essentially a reverse mortgage except that you are doing the deal instead of a financial institution.

I'm not a fan of "special deals", especially long term situations.

These was discussed in other threads but:

What if they want/have to move at some point?
What if they stop paying the rent?
What if you run into financial problems down the road?

My suggestion is that they either:

1) Sell the house, move out and rent something else.
2) Stay in the house and you + siblings contribute money and just give it to them ie $10k per year for travelling.
 

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Discussion Starter #7
Your heart's in the right place, but I think your idea is unwise.

First, there is no guarantee that the home will be worth $600,000 in 20 years. It could be more or less. There's no guarantee that the home will increase by the amount that you expect. Also, have you worked out the return? To grow $400,000 to $600,000 over 20 years requires a return of only 2% (just over 2%). Don't forget that you'll be taxed on the capital gain as well. After all, it's not your principal residence. Also, don't forget that you'll have to pay property taxes. After you account for taxes, you'll earn less than 2% per year - perhaps substantially less.

Second, there's no guarantee that your parents will still be in that home 20 years from now. If they are in their 70s now, then they would have to be alive and well in their 90s. Even if they are alive (and I wish them long life) they may not be healthy enough to stay in that home. Even if they are healthy enough, they may want to move to a retirement/adult condo for lifestyle reasons.

If you have the income to buy their home, you may be able to help them in other ways. For example, do they have TFSAs? If not, then you can simply give them the money to invest. Both parents can have $5,000 invested per year for a total of $20,000 ($5,000 X 2 X 2years). If they invest conservatively, say a bond ETF, they could make ~ 4% (about $800 on $20,000). If they invest more aggressively, say a REIT paying 8%, they could get ~ $1,600 tax-free per year - enough to improve their lifestyle. I'm sure others will have a lot of ideas as well.
I look at it as turning $80,000 into $500-600,000 over 20 years as I am not investing $400,000, just the down payment. My parents are paying my mortgage with the rent and they would also be responsible for property tax, insurance, utilities and maintenance.

If my parents want/need to move at any point then I guess I have the option of renting the house to another party or selling and buying them a condo instead.

Regarding the TFSA, yes they could take $20k and invest it there tax free but I see them.
 

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It seems like a fine idea, but there are some risks (Aside from the very significant tax issues).

-There is a risk that your paren'ts income will be insufficient to meet the liabilities of the house and you will be forced to move them (which may create some personal tension under the lifetime no eviction clause). Its fine for the first few years when you have given your parents $400,000, but if your parents did not save for retirement, they may make irresponsible financial decisions and not be able to keep making payments for the full 20 years based on that lump sum.

-Working capital investment for you is $80,000. There is the opportunity cost of that money if it were invested elsewhere (like the TFSAs). Everyone usually recommends to pay down mortgage debt, but you are taking out a new mortgage on an already paid off house and expensing it to your parents (who must pay it out of their lump sum received). Your combined wealth will decline by the value of the mortgage interest.

-There is an interpersonal risk that your parents will feel near the end of the arrangement that you have cheated them and they could have gotten more for the house (especially if they are not financially savvy and don't fully understand the arrangement, and have little cash remaining). As long as you are willing to continue to support them after the money is gone (and it sounds like this is not a problem) this should not be a big risk.

-There is also the risk of interpersonal conflict with your siblings who may feel you are cheating them out of their fair share of their inheritance. I know you mentioned that you all don't need the inheritance, but if you are profiting and the others are not..... (you had better include them equally on the deal if possible).



It might work better for you and your siblings to make regular payments to your parents to buy the house over 20 years and just invest your excess cash. This will help keep your parents financially responsible while also allowing them to go out and have some fun. $400,000 over 20 years is $20,000 per year. You could pay them $10,000 - $15,000 per year to still allow some profit for yourself. I think this would avoid all the mortgage interest and taxes, while not having to come up with $400,000 all at once. Kind of like a 20 year layaway plan.
 

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My parents are retired and in their 70's. They have a nice bungalow in a nice retirement community that is probably worth $400k. Although they have a few bucks put away, my Dad was never good at really planning for retirement and subsequently they are living with less disposable income than they would like. The good news is they are healthy, happy and very active.

... My siblings and I do not need any inheritance and often tell my parents not to worry about leaving anything to us.

Any comments appreciated!!
It seems to me getting a reverse mortgage from a financial institution would avoid all the interpersonal and inheritance problems that have been mentioned.
 

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Discussion Starter #11
Some great points Max - thanks. The issue of my siblings being ticked off has been weighing on my mind and my wife has some concerns about the whole plan so I have to give this one some more thought.
 
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