Mixing family and business can be challenging even in the best of circumstances.
How about doing it with your aging parents who are getting a divorce after more than 40 years of marriage?
Is it a good idea to invest in their house as part of a financial cog to help them settle their divorce?
That’s what a listener of the Clark Howard Podcast recently asked.
Should I Invest in My Parent’s House So My Dad Can Stay and My Mom Can Move Out?
Should I invest in a house with one of my parents under difficult circumstances?
That’s the question a listener posed to Clark on the March 23 podcast episode.
Asked Mike in Virginia: “My parents are in their late 60s and after 40+ years of marriage, they are getting a divorce. They live in Texas and as a means of splitting their financials, my father wants to remain in their house but is looking for an investor so he can give my mom her half of their home value.
“I was asked if I would be interested in purchasing half of the home. The home would be under my name and my father’s but would not create any residual income. They live outside of Austin and I feel the market is strong there and the home value will only increase substantially over the next 10 to 15 years. Mixing business and family is tricky though. Any suggestions?”
The divorce, and potentially doing business with a family member on a major investment, both raise issues that Mike needs to consider carefully, Clark says.
“We’ve talked about this trend with people in long-term marriages later in life getting divorced. It does create a number of financial issues and is often very upsetting to their adult children,” Clark says. “It is part of modern life. And I’m sorry that you’re experiencing it with your parents.
“I want to make sure that your mom is OK with this idea. Because we’ve got human feelings involved in this as well. Does she feel OK with this being the way for her to get her cash out of the home? For you to be an owner of the home along with your dad?”
Clark’s Advice: Hire a Real Estate Attorney
Let’s assume that Mike’s mother agrees with him buying out her half of the house as part of the divorce settlement. And that Mike decides to do so.
This is still a major business deal with a family member. As such, Clark thinks Mike needs to hire a real estate attorney who practices in Texas. (Not a general practice attorney.)
“Talk him or her through the issues,” Clark says. “What would happen in the event that your dad later needs nursing care and would be using the Medicaid program? Would that put your equity at risk?”
Get the real estate attorney to draw up a proper contract as well, Clark says.
“Because you are mixing family and money, there should be a written understanding about how things will work,” Clark says.
Mike said his dad is approaching 70 years old. Before cementing this deal, Clark says, consider what you’d want to do with the home in the future.
“At what point might you buy out your dad’s half from him?” Clark says. “Would you want to own a home living in Virginia that’s halfway across the country in Texas? There are things to think about.”
Assessing the Potential Returns for Single-Family Homes in Austin, Texas, Going Forward
Buying even half of a home is a huge investment for most people. It’s important to think about how it fits into your overall financial plan.
Putting that type of money into an asset comes with an opportunity cost for other things.
Clark isn’t as convinced as Mike that Austin’s home market will continue to produce stellar returns.
According to Zillow, which shows data going back five years, the median home in Austin sold for $354,995 as of February 2018. four years and three months later, in May 2022, the market peaked at a median price of $670,000. That was a massive 88.7% increase.
However, in the nine months since then, the median values have sunk 19% down to $542,500.
“Austin has had a big run-up in value. When a market tends to have a big run-up in value and housing costs in a relatively short period of time, it tends to go through a significant period of lagging returns,” Clark says.
“If that’s going to happen in Austin, hard to say. But historically, that’s how things work is what’s called reversion to mean. And so you can’t count on values of real estate in Austin, single-family homes, continuing to rise in the future as they have so radically in the last few years.”
Doing financial business with a family member presents a particular set of challenges. The emotional stakes ratchet up even further if you’re entering this type of agreement to invest with a parent in the middle of a divorce process.
However, Clark’s advice isn’t a hard no. He suggests making sure that both parents are OK with the move first. Then hire a local attorney who specializes in real estate. Get a contract in writing for your agreement.
From there, make sure that your decision isn’t putting you into a logistical or financial bind.
If you’re OK with all of the above, go for it.