Should I buy my parent's house or a duplex?

Question

Recently I set a goal to buy a duplex and try house hacking with an FHA loan. My current situation is that I am renting a house from my parents. They asked me if I wanted to buy that instead, either purchase would be my first property purchase. My parent's house does need work and I think I could probably flip it in a year or so with the FHA. But I have a few questions.

Should I buy it or continue onto my duplex plan?

If I buy my parents house what kind of deal could I try to get without taking too much advantage of them?

Has any one had experience buying from parents that went well for both parties?

How can I make my parents house work more as a flip without incurring too much gift tax or other such tax burdens?

What might be the pros and cons of abandoning my duplex plan to doing this instead?

Any advice would be much appreciated.

Thanks!

Giovanni Luna · Answer

Plus you can do seller finance and if you just give the 12-20k equity I don’t think they would have a problem with that. This way you get the loan you need for a lower mortgage probably then what they pay and you can refinance later to buy solar panels to save money and gain money from the city depending on how many you buy so you can sell to the city.

Anthony Gayden · Answer

@Monica McDowellGetting a deal on your parent’s house is not something I would do.-it teaches you nothing in terms of finding deals-it takes away your self reliance, and your parents may perceive that you owe them for doing you a favor-It will encourage you to take a lackluster or even bad deal because you think you are helping them out or that it is easier -You won’t truly be investing in real estate, just buying a personal residence

Basit Siddiqi · Answer

@Monica McDowellWhat about this scenarioYou purchase the property from your parents. They use a portion of the proceeds from the sale to partner with you on the duplex that you want to buy. That way you have 2 properties.One thing to point out though - if your parents property is really worth $550,000 it likely won't cash-flow that well. So you prolly will need to go the route of fixing it up and selling it to get additional money.One thing to consider is that the IRS can be more scrutinized when dealing with sales between family members that are not arms-length transactions.

Giovanni Luna · Answer

what is the square footage and room/bath? I would say buy your parents and turn it into a dupl x or triplex

Monica Abeyta · Answer

@Jay Dimacali thanks so much the information Jay! Super appreciate it! I’ll inform my parents of the land trust and go from there.

Jay Dimacali · Answer

@Monica McDowell subject-to means getting the property with the current loan in place. You just take over. Use the land trust to move the house into the trust first before taking the property subject-to. It's highly unlikely but the bank might call the loan due if you get the house via a quitclaim or some other way. In a land trust, you can just tell them the house is in a 'trust.'I wouldn't recommend buying the house from your parents. Another loan in your name and the house gets reassessed = higher property taxes. Ask me how I know.Getting shut down by the city for adding on another unit isn't great but it's not over yet. I would look into seeing about having the garage converted into a unit. Depends on Glendora's rules but in LA I'm sure you've heard about the city being more 'lenient' about granny flats and the like. It costs money to do it legit but you could be looking at a good $1k a month. Check out the IKEA in Burbank and they've got a set up for a 400 sq ft apartment that looks great. It's got everything and the kitchen sink.

Jonathan Soto · Answer

Buy a duplex with an FHA and see if your parents want to owner finance their home to you. Win win situation. Best of Luck.

Monica Abeyta · Answer

@Jay Dimacali Hi Jay! I will research the land trust but do you have any info on how that process works so I can get a general idea of what that is? Would be great to save on the taxes that's for sure. I would love to add on to the property but I was just reading up on the cities residential zoning laws today and that might be a bit difficult. It is in Glendora. They require so much setback on the front side of the property. The property already has a pool in the back with no room on the sides or back to add even a small guest house. The front lawn has so much space though but if I am reading the zoning restrictions correctly there isn't much room for an addition on the front side without violating the zoning laws.I will do more research on this as well but what does subject to mean?Thanks for your response!

Monica Abeyta · Answer

@Karen O. Hi Karen! My parents would not seller finance as they still owe about 200k on the place. They have been wanting me to buy the place for awhile but I haven't been ready till now. Since I just recently got into real estate investing I am now weighing my options out as now I would look at it as an investment instead of just a home for myself. I think they would sell closer to the low end of the FMV range but we have yet to discuss the details. @Shawn M. The win win scenario is what I am looking for. I want them to get value out of the house while I can still either flip it and make money or move on so they can get top dollar. I have a couple of agent connections so I will reach out to them and see if I can get the ball rolling to gather up the correct information.@Teri S. That there is solid advice. I never thought of it that way. I will definitely approach them with that idea. It could definitely turn my smaller down payment into more money while getting them the value they want out of the house. Thanks so much for that!

Jay Dimacali · Answer

I think all the other posts have great points. I would just add look into using a land trust to transfer ownership to you. To me the biggest benefit would be you won't get reassessed for property taxes and you get the beneficial interests. I would also agree with another person's suggestion of adding onto the property. You're in LA so there is the big push to have increased housing. Why don't you look at to see about making a 3-unit addition to make your place into a fourplex. That still counts as residential. I also think it's a great idea if you can take your parents loan as a subject-to. You can then look into getting a HELOC to help you with construction costs. Right now even the big banks are offering up HELOCs and you can look into that before the market takes a dip and the banks pull HELOCs off the table. Just some suggestions of what I would be thinking to do. Good luck!