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My wife and I recently moved to an expensive area of the US for her job, the school district and other reasons. We are currently living with my wife's mother, in her house. After a recent divorce she now owns the entire house but has to pay off a loan she needed to pay out her ex-husband.

We are not sure how long we want to stay in this area. We are both in our late 30s, and we don't need the school district anymore when our children go off to college in ~10 years. We may want to move elsewhere in 10, 20 years or so.

My mother-in-law is already retired and may no longer want to live in this house once we move out, but rather sell it, move somewhere smaller/cheaper/... and use the difference for her retirement.

Considering that

  • we will support my mother-in-law financially to contribute to the loan and upkeep of the house,
  • we would like to build equity (not necessarily in this house, could be another one or another form of investment) in some way as opposed to just paying a normal rent,
  • we do not want to put my mother-in-law or my wife's sister, who would inherit half the house (?) at the time of my mother-in-law's death, at a disadvantage,

what are our options?

This may very much be a have-your-cake-and-eat-it situation, but maybe there are some good ideas out there.

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  • Why would your wife's sister inherit the house? Wouldn't your wife get half, or does she get other stuff in lieu of the house?
    – D Stanley
    Sep 8 '21 at 19:45
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    @D Stanley: At the most basic level, the current owner can leave the house (and anything else she owns) to anyone she pleases: one child could get everything, both could be left out in favor or a new boyfriend, she could leave everything to charity... But all of this isn't really financial. Maybe the interpersonal relations site: how to keep in good with the older folks in order to enjoy an inheritance?
    – jamesqf
    Sep 8 '21 at 21:01
  • @jamesqf Sure I get that the estate can be divided any way the mother wants, I was just wondering why the sister was getting the house if they are living in it and helping to pay the mortgage. (or if that was a misstatement)
    – D Stanley
    Sep 8 '21 at 21:12
  • The sister would inherit half the house (as I stated in the question), yes, if no other provisions are made by my MIL. Sep 9 '21 at 12:41
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    How do your personal circumstances change your investment options, please? X combination of people has Y disposable income, no? Sep 9 '21 at 20:56
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My first thought -

Cash is also "equity". You don't say how much you're contributing to the loan on your MIL's house, but one way to built "equity" would be to save as much cash as possible for a down payment on your next house (at which time that cash will be turned into "home equity" by borrowing significantly less than the house is worth)

If you want to capture some of the equity from your MIL's house, you can try to work something out with her (e.g. when you make a loan payment you get "credited" the principal amount of that payment), but that's between you and her (and any other heirs she has).

Note that by "cash" I don't mean just physical cash or a savings account. It could be in an investment account if you can afford to take some risk in exchange for higher potential growth.

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    Put another way, it's wealth you want to build. Equity is just a measure of the difference between the value of an asset and what you still owe on it.
    – chepner
    Sep 8 '21 at 21:02
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The simplest approach is to pay your MIL an amount of rent that is equitable to both parties, including utilities. In fairness to your MIL, it might include an agreement to share the future cost of living increases (utilities, landscaping, property taxes, home insurance, etc.). then save as much as you can for the future purchase of another home.

Building equity in the current house would be more far more complicated because you'd be buying 1/2 of what ostensibly you'd be inheriting for free. In addition, your SIL would not be paying toward her "free" half.

An out of the box idea might be something like a pseudo reverse mortgage. Your MIL puts the house in an irrevocable trust where each party gets 1/2 at her demise (this complicates your mother selling and then buying another house). You appraise the home now and agree on a purchase price. Half of your mortgage payment goes to your SIL and upon demise, each sister owns 1/2 the value of the house but your SIL's equity is reduced by the amount of money received over the years. She's not disadvantaged and you build equity instead of paying rent for X number of years.

The smartest thing to do would be to consult with your family lawyer who'd be far more versed on equitably resolving such situations.

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    The reverse mortgage takes the medal. Pay the market rate for housemate shares as plain old rent, then pay any additional amount beyond market as a reverse mortgage on the house. This is then a lien on the house that you collect when the house is sold. Sep 10 '21 at 0:30
  • Good idea. That's a simpler solution. Sep 10 '21 at 1:20
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You could pay rent, month-to-month, until you are settled and have confirmed in reality that your plan in this new town is right for your family.

If everything goes well in the new town, you might want to buy your own place, anyway. Then build your own home equity.

As for m-i-l's finances, she might consult with her daughters or seek her own professional advice. She could even write you a family mortgage to buy the house from her today, if she likes.

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Depending on the timeframe in which you would like to make use of this "equity", investing in mutual funds or index funds may be something for you to look into.

If you will need access to the money in less than 5 years, then this suggestion is less useful, but your timeframe seems to be out to at least a decade.

In 5 years or more, the money invested in these funds will likely have grown at a good rate over that time, giving you a good return. This has the benefit over buying your own real estate, as you will have to deal with managing the property (or paying someone to manage it), and then deal with selling it to recover the money. The returns on real estate may be more, but it will likely need additional overhead in effort and expenses.

I would suggest not attempting to arrange things so that you are somehow "building equity" in the MIL's house. Arrange with her to pay a fair (not necessarily market) amount for rent and expenses while you are living there. Treat this as an expense and not an investment.

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Seems like you are overcomplicating it. You don't need to 'build equity', you need a short-term roof over your head.

Pay her fair market value for rent. Maybe a little lower since you are a known to her (less counterparty risk) and she won't have to pay taxes on it. If you are good tenants it will be win-win.

Then put whatever you can save in a sensible investment vehicle such as US equity index funds (VOO or some such).

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One way is to invest excess cash into either a mutual fund or individual stocks. When using this strategy it is best to buy and hold versus day trading. Another way is to invest in rental properties in another area and hire a property manager to manage it for you. This could be a future property that you want to move into and are taking in tenants at the moment.

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