How To Help Family Invest In Real Estate

Added January 19, 2009 by Ilyce R. Glink

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Summary: A father is purchasing real estate with his son by loaning him money for his down payment and wants to know how to determine the return on investment for the father. The father and son should sit down and talk about the purchase to ensure they both know what roles they are playing. A real estate attorney can help them draft a partnership agreement that spells out the terms and conditions of the purchase.

Q: I am entering into a real estate purchase with my son. I will loan him $60,000 which will be his 20 percent down payment for a condo purchase.

He will have a renter who pays him $800 per month. He will pay the mortgage and taxes.

How do we determine the return on investment for me? We were thinking that he would refund to me, each year, the interest deduction he receives on his income tax return and then I would share in the proceeds of the condo when it is sold.

What do you think?

A: The first thing you and your son should decide is what role you're really playing here. Are you truly an "investor" in this property or are you helping your son make his first real estate purchase, looking to get out of it only your initial down payment with maybe a small return going forward?

If you're truly an investor, then you should share the pain and the gain of the investment. Why shouldn't you receive a share of the profits after taxes? Why should you be limited only to the amount of his interest deduction on his federal income tax return? What if the renter leaves and your son has to pay the entire mortgage himself? Will you chip in again? What if he can't afford it? Are you co-signing this mortgage? What happens if he wants to buy you out at some point in time?

On the other hand, if you're simply doing your son a favor by giving him a hand up, I think you should settle for getting your down payment cash back and perhaps sharing in a small portion of the proceeds when the condo is sold.

You and your son should sit down and talk about this because it's possible you each see your role differently. Once you come to a meeting of the minds, you and he should hire a real estate attorney to draft a partnership agreement that spells out the terms and conditions of your agreement.

Spelling it all out will protect you and your son legally. But in the long run, spelling out your roles and the financial arrangement to which you've agreed will protect your father-son relationship, which I'm sure is more important to you than any single real estate investment.

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