.... family members house in exchange for equity?

I.e. put 20% down for a family member in exchange for, say, 30% equity

Family member is trustworthy and financially prudent.

Thanks y'all, pretty much along my lines of thinking as well.

I'm not sure how that would work if they are having to get a mortgage from a bank for the rest of purchase price.

But, if you want to help out a family member, do it. Just make sure it's either legally documented, or else mentally treat it as a gift and if you get paid back in the future, good for you. Don't just "shake on it" and assume it's legally binding in some way.

I've seen this done more times than I can count and only had a couple of situations that turned a bit frustrating. Recommend it 2-3 times per year, but make sure everyone is on the same page regarding range of outcomes, backup plans, etc.. before pursuing.

If both parties understand if it is shared equity or a loan, who will pay for repairs/improvements of various types, and what happens if a bad situation happens before the deal works itself out (lost job, health event, etc...), it is often a good outcome for both parties.

It doesn't work well if the party with the resources likes to use money as a weapon/leverage. It also doesn't work well if the receiving party really views it as a gift, when it isn't. Outside of that, it can be done if you take care to all approach it more like a business deal with a partner than anything else.

No. No. No. No.

I was leaning towards no already but am struggling with indecision surprisingly. The deal would be $50k down for a 100% premium on equity (ie $50k down gets me 20% equity in a $500k house).

I think it depends on the family member and why they are needing/wanting to do this.

I was fortunate enough to be in a position to loan my parents money on a few occasions for both houses and business ventures and never hesitated. I knew their financial situation and we drew up simple contracts (mostly in event something happened to me or them, other family members would know the loan existed). I was always paid back within 6-12 months as agreed.

With that said, I wouldn't loan my nephew $100 bucks, but I would give it to him if he was in need.

Is it financially prudent to offer 30%;equity for a 20% participation?

If they are getting a loan your contribution will be documented as a gift unless you are on the loan and 100% liable for the entire debt.

A couple more points for context if it is helpful.

I wasn't planning on being on the loan, just a written agreement between them and myself which is where it gets shaky. The home would be in the DC area so a $600k home is definitely a studio/2Br starter of some sort.

Are they getting a mortgage? If so you're going to have to sign a gift letter and document the gift.

Thanks y'all. Have some praying and research to do on this.

Edit

I think a straight loan to financially responsible children, documented, and with clear monthly repayment arrangements is doable. As mentioned, prepare to submit a gift letter though. But what you are describing where covering 10% buys you 20% equity, this by definition is not a financially responsible individual - they can't be to consider this. Don't do it.

I would consider it if it was an investment property. Otherwise,I would treat it as a gift and not expect the money to be repaid.

I would do it only with the expectation that it's a gift and you won't ever get the equity.

So if in the future you see the equity when they sell it and they pay you back, great. What happens if they never sell? What happens if they die and the home inherited by someone else? You need legal contracts to ever enforce the return of your equity.

Always approach money lending to family as a gift you'll never get back. If it's too much of a burden, then don't lend or gift money, or give less with no strings attached.

Unless this is some sort of home flip for profit?

If your family member will be living in the house, you won't get any benefits. What if they move out and rent it, will you get 30% of the rent profits?

Probably better to just gift them a smaller amount with no strings attached if you want to help them.

Dill-Ag13 said:

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A couple more points for context if it is helpful.

I wasn't planning on being on the loan, just a written agreement between them and myself which is where it gets shaky. The home would be in the DC area so a $600k home is definitely a studio/2Br starter of some sort.

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Have they been living in the area and been paying the equivalent in rent? Or is this all new fiscal responsibilities?

Only if you're prepared for a partition lawsuit.

In my career I have seen this sort of thing more than a few times. Sometimes I would get asked what I thought about it, the tax implications, etc., other times I was only made aware of it when they brought in their tax information. I was fortunate to have a lot of very well off clients, at least by my standards they were. My opinion, generally, is that if the child is old enough to be on their own, and wanting to buy a home, then they need to truly be on their own and do the whole deal themselves which is what I bet the parents did at their age. But time and time again, I saw the children in their mid 20s to early 30s buying a house far, far nicer than their parents had at that age and, more often than not, a nicer house than their parents currently lived in. And their children were able to do that because of the help they got from the parents. Often, substantial help.

Mostly, the parents had plenty of surplus funds and there was not a lot of risk of losing any money on the deal. Just not sure what sort of lesson is being taught when they take actions to "help" in a situation like this. But it was their business, not mine.

I think there would be some massive disagreements about how to divide the equity up at the time of sale. I.e. if the person living in the house put in a new kitchen, roof, deck, fence, etc which would all increase the over all value of the house would you get 30% in the equity of those upgrades?

Would you have a say in how they maintain their house since you are a part owner or would they be allowed to let the house fall apart?

This may be getting too far in the weeds, but how would you handle repairs, etc…

s years go by, those costs add up. Often I feel the appreciation in a home is likely equal to the costs (large and small) that go into upkeep.

If in 10 years you paid none of that I could see potential for resentment (not necessarily saying it's justified)

On the other hand, if you agree to pay some of the upkeep, what constitutes your obligation? They want new countertops but you don't fee they do? Things like that should be discussion advance

Dill-Ag13 said:

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I was leaning towards no already but am struggling with indecision surprisingly. The deal would be $50k down for a 100% premium on equity (ie $50k down gets me 20% equity in a $500k house).

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So now he is offering you a 20% stake for 10% down?

If he puts nothing else down and only lives there for a year before he sells it you could lose everything in closing costs and fees.

Never do business with family.