Taking Care of Mom and Dad: Sale-Leaseback
An alternative to a reverse mortgage is a sale-leaseback. In this case, you or some other family member assume the role that the bank plays in a reverse mortgage.
The advantage of this arrangement is that the benefits that accrue to the bank in a reverse mortgage accrue to you, allowing you to provide your parents with a better "deal." Plus, sale-leasebacks avoid many of the fees associated with a reverse mortgage, further reducing the costs, and therefore increasing the return to your parents.
How does a sale-leaseback work? The mechanics are as follows:
1) You buy your parents' house directly from them, financing the purchase using a mortgage that is owned by your parents. Your parents act as the lender, owning the mortgage that would normally be owned by a mortgage lender. This is no different than "owner financing" -- buying a house with the former owner financing the purchase.
2) You then lease (or rent) the house back to your parents. This is no different than you buying a property as an investment, covering your costs by renting out the property.
The advantage of this arrangement versus a reverse mortgage is that you keep your parents' home in the family with less of a burden on your parents. You assume all the responsibilities of a landlord, including paying the property taxes, insurance and the upkeep and maintenance of the property. Your parents then will no longer have to concern themselves with these homeowner duties. Because the home is your rental property, you get all of the tax advantages of a real estate investment. You can deduct the interest you pay your parents, the taxes, insurance, maintenance and depreciation on the property. You need to work with your tax attorney or CPA to determine if this arrangement makes financial sense for you. You also need the free cash flow necessary to finance this transaction.
As far as the monthly cash flows work, you can choose to make a down payment on the house to your parents or finance the entire transaction; it's really a function of what your parents' immediate cash needs are. Instead of exchanging checks with your parents each month, you could deduct their rent from the monthly interest and principal payments you make to them.
All of this said, sale-leasebacks make the best sense if your parents have considerable equity built up in their home and the home has enough future value that it makes sense to be part of your investment portfolio.
In a sale-leaseback, you will be assuming all of the risks associated with any other real estate investment. This risk can be mitigated by your insight on your parents' home's intrinsic value and the "psychic" reward of facilitating your parents' ability to continue to live where they are most comfortable.
