Need your help

[Karen Lee]

I am thinking about buying a house to lease to a couple that run Adult Family Homes. They did not qualify to buy this particular house so I am going to buy it. The catch is that my mother is to live there and receive care.

The options are: My mother buy it or me buy it. It would be strictly investment property for me but what if my mother were to buy it would it qualify as her primary residence if she were to live there or just investment property for her too.

Please give me things to think about and opinions.

Thanks

Karen

[Daune/CA]

Since neither you or your mother would be living there when the property was leased to the Adult Family Homes, it would appear to me that it would be investment property, even if your mother later became a resident of the Adult Family Homes, as long as she does not have a business interest in the operation of it.

[JohnH]

One major consideration would be potential liability issues.

I'm thinkng you would want to consider owning the property through an LLC owned by you, your mother, or both of you.

[kcjenkins]

If your mother owned the house, and lived in it, with the 'caregivers' living with her but not leasing the house, then it would be her personal residence, and if she later had to be moved to another facility, she could sell it and take the §121 exclusion. Or if you then inherited it, you would get stepped up basis.

But if you want to lease it to someone who would then operate the house as a business, it would probably make more sense for you to own it, not only for tax reasons but also for liability reasons. Since you would be renting it to the caregivers, the fact that your mother did or did not end up being one of the people occupying it would not be a factor at all. I think you would be wise to set up an LLC to actually own it, even if it's a disregarded entity for tax purposes, since there could be issues in such a business.

[mcb39]

I agree with KC and John......

[Karen Lee]

I was going to do a triple net lease but the people that want the house for the Adult Family Home want me to buy, fix it up and maintain it. This was never my intention. So the deal is off at this point for me. The triple net lease would mean it would be strictly investment property.

OH Well

If I wanted to be a landlord I would buy something else. If someone wants me to buy a house for them, fix it up and maintain it then just give me a call. I would do that and continue living in my 30+ year old single wide trailer.

Karen

[JohnH]

I think you made a wise decision. It appears that they wanted you to be at risk for a major part of their business without giving you any upside profit potential. And if things didn't work out, can you imagine the negative publicity if you were trying to evict the residents of an Adult Family Home?

I know there are exceptions to what I'm about to say, but your original comment that "they did not qualify to buy this particular house" initially caused me some concern. If the bank won't lend them to money to provide a hard asset to start up their business, there's a good reason. . After all, this isn't a working capital loan - presumably a house would be a fairly secure asset and about all the borrower would need to demonstrate is the abiity to repay the loan and a track record of having paid their bills on time in the past, plus a sufficient down payment to somewhat mitigate the lender's risk. I'm not sure you'd want to assume a liability that professional lenders have turned down

[kcjenkins]

I agree, you made the right decision. That sounds like a very lop-sided deal, you get all the risks and headaches, and they get to make money off your investment. And, to add to what John points out, if they have bad credit, odds are they are not the kind of people you want taking care of your mother, either. Dependability is one of the primary traits that you want in a care-giver, after all.