A catching headline first - how to buy a $1m property with $0 down and earn $30k/yr net at the same time?! Seriously!
This is a long, serious question on designing rent to buy with me on the buyer side for investment. Hope you can help.
Assumptions first.
- I'm in California where we have a unique proposition 13. Basically property tax can only increase by 2% a year. Tax rate is 1.25%.
- I am going to buy a rental property which the current owner pays property tax at $500k assessed value while the property has market value at $1m.
- the current owner has fully paid off and he is at his early 70s. He wants to get stable monthly income more than what he can get from current rent, has no energy to manage the property, no cash to repair, yet concerns about low CD rates, tax, and inflation. He does not want to sell the property immediately.
- the property today has a below market rent at $40k a year. It lacks needed services. The same property next door rents for $100k a year.
My objectives:
- take advantage of the delta in property tax (if I buy it today, I will have to pay property tax with basis at $1m)
- take advantage of the $60k rent differences (he is too old and has no energy on rental)
- take advantage of deferred taxes (buy 10 years later)
- take advantage of his low income tax rate (he has no other sizable income source)
The question:
Could you suggest a simple (to be understood by a 70+ years old owner) scheme that is win-win to both parties?
As a starting point, I am considering rent-to-buy, paying him $70k a year for 10 years with inflation adjustment, then buy out at $500k (all numbers are placeholders).
I believe this is a quite representative case, with me on the other side of the table many years later. Appreciate all your input.
This is a long, serious question on designing rent to buy with me on the buyer side for investment. Hope you can help.
Assumptions first.
- I'm in California where we have a unique proposition 13. Basically property tax can only increase by 2% a year. Tax rate is 1.25%.
- I am going to buy a rental property which the current owner pays property tax at $500k assessed value while the property has market value at $1m.
- the current owner has fully paid off and he is at his early 70s. He wants to get stable monthly income more than what he can get from current rent, has no energy to manage the property, no cash to repair, yet concerns about low CD rates, tax, and inflation. He does not want to sell the property immediately.
- the property today has a below market rent at $40k a year. It lacks needed services. The same property next door rents for $100k a year.
My objectives:
- take advantage of the delta in property tax (if I buy it today, I will have to pay property tax with basis at $1m)
- take advantage of the $60k rent differences (he is too old and has no energy on rental)
- take advantage of deferred taxes (buy 10 years later)
- take advantage of his low income tax rate (he has no other sizable income source)
The question:
Could you suggest a simple (to be understood by a 70+ years old owner) scheme that is win-win to both parties?
As a starting point, I am considering rent-to-buy, paying him $70k a year for 10 years with inflation adjustment, then buy out at $500k (all numbers are placeholders).
I believe this is a quite representative case, with me on the other side of the table many years later. Appreciate all your input.
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