Multifamily/apartment building w/ retiring father AND room mates AND potential child.

[Don Fisco]

Just made an account here to try and organize my thoughts as I don't know where to begin. I'm sure I will not provide the proper information for you all to give me the right advice but this is what I've got:

I'm a somewhat recently married 36-year-old dude. My wife and I have been living in Los Angeles for over a decade. Working professionals in the film & TV industry. Since Covid, I work from home. Recently we've started talking about having a kid, probably sometime in the next year. Our current apartment is too small for that. We don't want to move out of Los Angeles as our friends and (more importantly) our careers are here. 

We want to own property.

My father is retiring after working in the post office for forty years and is a widower. He's back in New Jersey where I grew up, but he's all on his own and I want to bring him out to Los Angeles so he's not lonely in his retirement years. 

For the past five years, my wife and I have lived in an apartment together, and before that, I lived with two guys in another apartment nearby. The four of us are all close friends and we hang out regularly and have a good rapport. 

As we all know, the housing market in Los Angeles is incredibly rough. My wife and I won't be able to afford a house on our own, much less one that will have an ADU for my dad, as he would most likely want some amount of privacy and freedom and not just a room in our house. Having done the barest of research, we've looked into the idea of pooling our money to try and buy a multifamily for my wife and I, my dad, and the two friends, as the two friends also want to stop renting and to start owning, even if it is part of a multifamily/apartment building. A place that has enough units that we could have renters beyond ourselves that would help offset the mortgage payments we would be paying.

The breakdown of what we know we have saved up that can be used for a downpayment:

My wife and I: $165,000~, can probably get that to $200,000 within a year. Our combined income is, on average, around $230,000 a year. My credit is above 800. My wife's is in the high 700s. 

My Dad: $50,000-250,000 (the range is dependent on if he were to sell the NJ house and divest himself of the East Coast completely, or sell the NJ house and buy a NJ condo and use the difference to help contribute to a unit out here in LA. Just depends on how attached he is emotionally to NJ. The NJ house is probably not going to sell for a lot either way. As a postal employee, he has a guaranteed pension, but not a lot of savings -- I know, complications, complications). His pension plus survivor benefits will net him around $80,000 a year but I'd like to not have to rely on him spending too much in his retirement for this beyond the downpayment if possible. His credit is in the high 700s. 

Friend 1: $25,000, within a year he expects to have $60,000, which he will keep upping to get him to $100,000. This is a big thorn in our side for the plan. He generally makes around $100,000 a year. I don't know his credit.

Friend 2: $400,000. He inherited and is willing to use it all on this endeavor. He also makes around $100,000 a year. I don't know his credit.

NOW

With all of that said, where do I go from here? I'm itching to learn as much as I can. I want to find a way to make this work. Tell me how I can make it happen, tell me how I'm an idiot and it's impossible. Tell me the books, the courses, the websites, the certifications-- whatever you think I need to know to not be as ignorant as I am now. 

[Jon Schwartz]

@Don Fisco, this is a complicated endeavor, but most of my clients have complicated aims, and I love a challenge.

Firstly, you want to talk to a real-estate lawyer about the in's and out's of a tenancy-in-common deed. (I think I can get a solid referral for you.) A tenancy-in-common (TIC) is when multiple parties collectively own a piece of property and have assigned use of different units within the property. TICs are becoming more common in LA these days; they're like condos, but the structure is different.

I'm not a TIC expert, but from what I understand, adjusting the ratio of ownership is difficult. I believe the different parties can start at difference percentages of ownership, but to change those percentages, you'd need to create superseding deeds... which is doable... but this is where you need to speak to a TIC-experienced lawyer about what's possible and what the costs will be.

Forming an LLC would make adjusting ownership percentages easier, but I doubt you'd be able to get a loan. When you buy a property as tenants-in-common, everybody in the group is essentially combined to qualify for the mortgage. Between the four of you, you make about $510,000/yr, which will qualify you for a sizable loan. If you form an LLC, you'll have a new company with $0 of income. Good luck getting a bank to lend $1M to an LLC with $0 of income!

So, there's a structure through which you can do this (a TIC deed), and you definitely need to consult with a real-estate attorney who has TIC experience to understand how to go about doing this.

Now let's talk about what's possible with the numbers you've shared...

You presently have $640-840K for a down payment and a combined income of $510K. With that income, you should be able to borrow upwards of $2M. Add the down payment, and you're looking at a healthy budget.

Two problems:

You'll need to buy a fourplex or smaller. Once you get to five units, the loan structure changes (it becomes a commercial loan), and you won't be able to qualify with your collective income.

A fourplex means no rental income because your group needs four units, right? There is a workaround: ADUs! Multifamily properties are allowed two detached ADUs and a third ADU, if possible, inside the existing structures. So, without getting into the weeds, you could buy a fourplex, then build 2-3 ADUs for rental income. You have quite a bit of capital for the down payment, and I'd suggest allocated a chunk of it to ADU construction.

The second problem is finding a vacant building. It will be very hard to find a vacant fourplex in LA. If you buy a building with tenants, there are ways to remove them. Namely, I'm thinking of utilizing to Ellis Act to remove the tenants. The only catch is that you can't put any of the four units back on the rental market for a period of five years. If everybody's comfortable staying put for the next five years, you're good.

This remind me of another factor you'll have to keep in mind: Ellis Act evictions require 120 days' notice. That's four months. And you'll probably need to do some renovating to any fourplex you buy; that's another chunk of time.

So, in conclusion, this plan is doable. I believe the legal structure, financing, properties, and path to living in the building all exist. However, it will be difficult! It will be challenging to find a suitable property, then very challenging to go from opening escrow to, months and month later, moving in. You up for it?

Best,

Jon