Opportunity, or not?

Question

Hello everyone! I'm a new member looking for advice about an opportunity I've been given.

Due to my new job at a large mortgage lender, I started listening to BiggerPockets to familiarize myself with the real estate industry (math major, light underwriting experience, started with no real estate knowledge whatsoever). After 40-50 episodes, I decided I needed to read Rich Dad Poor Dad, The Richest Man in Babylon, etc. and also decided to give real estate investing a try.

My parents have fully owned a home in a more rural area of Southern California (imagine that Victorville is the closest "large city") for the past six years. It turns out, they want to move to somewhere more like Orange County and (when I asked hypothetically), offered to use the money from the sale of the house for a down payment on a 3- or 4-plex (or multifamily) so that I can get started in investing while they live in one of the units.

Is this a good idea? Any thoughts about business with parents/relatives?

Kiersten Vance · Answer

Hi @John Son. I have found the numbers to be fairly accurate, but I always run them through my own excel spreadsheet just to be sure they included everything. For the smaller 4plexs and under, owners don't always have a quickbooks (or similar) income and expense report for you to look over. So even if you ask, they may not have anything. I always ask for commercial income/expense reports to look over, so no I don't consider it bad form at all. You are buying the property as an investment so it has to make financial sense :)

Craigslist or apartments for rent is a good place too look for similar rentals in the area to compare rents that they are getting. I would be happy to run the numbers with you on a couple and show you how I do it if you would like! Best of luck!!

Carlos Altamirano · Answer

hello, and great question! One thing you have to consider is who is your target market? Who is your customer? I currently reside in Orange and invest out of state, in fact, all my portfolio is out of state in multi family. You just can't get the same returns on a buy and hold in california. Not yet at least. I would be happy to share how out of state is profitable for my self and my investors.

John Son · Answer

@Dylan Vargas, that makes sense, I can understand that. Thanks for your input!

Dylan Vargas · Answer

@John Son...depending on their age and lifestyle I would just make sure my parents would want to live in an apartment complex. Some people may want to and others definitely not. Know what I mean? There is no way my wife Joanne would live in an apartment complex unless we did not have an alternative. Not in a snooty way but in a privacy way. If we were broke and thats all we could afford she would have no problem living in an apartment. Make sense?

John Son · Answer

@Rebecca Cirisan, I've given it some thought, but I figured I should get a grasp on how things work up close before doing deals out of state, since I've only rented my whole life and my parents currently need a place to live. I'll be sure to reach out to you when that becomes a good option.

@Dylan Vargas, are there any hidden downsides to living in a 4-plex, as opposed to a 1-unit home? The only reason we considered it is because I'd like to invest in rental properties while providing my parents a place to live.

Dylan Vargas · Answer

@John Son Welcome! Are you sure your parents want to live i an 4 plex? That is the question I would ask 100,000 times.

Rebecca G. · Answer

@John Son Have you considered investing in an out of state deal where you could pick up 2-10 properties on what it would cost you for one in California? If you ever want to toss that idea around and get more information, id love to connect with you. You can find me here and also on Facebook.

Best of luck to you in your adventures

John Son · Answer

@Kiersten Vance,

Thanks for your suggestion on using Redfin. I did see a more thorough breakdown of income and expenses to analyze the deals in more detail. Have you found that the numbers listed are pretty accurate, or could I still request source documents to verify historical information myself? Is that in any way intrusive or considered bad form?

Based on what my parents are saying and a little research on the side, it's looking a lot like we're going to end up making a 20% down payment even if my parents occupy a unit, so the additional equity in the property should make the search slightly easier, even if OC seems a little pricy.

I'll find out when the house is listed and work on prequalifying / getting preapproved then.

@Vincent Guerrero, what are typical signs of "mismanaged" units? Do you have any search tips or physical appearance giveaways to look out for? I'm willing to make a weekend drive down a few neighborhoods, but I'd like to have an idea of what to note.

@James Triano, I think the family dynamic between me and my parents is a little tricky, but I want to believe most of our differences are unrelated to real estate and have no material effects on doing business together. If my parents were to live in a unit for free or for discounted rent, would you recommend some sort of payment / investment structure to make the situation a win-win? They're offering to pay rent, but they're also making the whole down payment. Do I charge them regular rent and cut them a part of the cash flow for their investment, or can their rent be heavily discounted at a fixed rate to keep things consistent? I know my dad can offer a lot of sweat-equity, but as far as property management goes (finding tenants, screening, basically any communication that prefers English as a native language), I will be in charge of.

I will try to "cold-call" a few agents listing properties I'm interested in shortly. Where have you found is a reliable source for current market conditions?

Also for everyone who's replied so far, feel free to PM me directly as well (: I'm not 100% keen on all the forum post rules just yet.

James Triano · Answer

@John Son

I think you're asking the right questions here.  Family situations can always be a bit tricky.  I DO think it's a good idea to invest and work with family members as long as they can be trusted and you have an honest relationship with one another.  Layout all of the expectations up front.  Obviously, this being your parents, I'd say go for it.  Of course, you need to do your due diligence.  Being new, I would just start picking up the phone and calling agents about multi-family properties in the area you're looking for.  Also, I wouldn't worry too much about what the current rent-roll is at an apartment (while it is great info to have) but start to learn about the area as a whole.  Learn about what the market rent rates are (because these could be higher or lower than what the current rent-roll is), what the schools are like, if the population is on the rise or is decreasing, crime statistics, etc.  This truly is a situation where you're going to "need to manage like your parents live there".  Good luck and feel free to contact me with any questions!

Opportunity, or not?

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