Keeping an attractive property in the family (Boston area)

[Max K.]

I'm a young professional in my mid twenties living in a desirable suburb of Boston. I have yet to invest but I am certainly interested and have been putting in the time to study buy and hold rental property investing recently.

The home I live in is owned by my grandmother, who will be deciding what to do with the property within the next couple of years. It's close to the city with commuter rail access 0.5 miles from my house and a great school system, making it one of the most sought after towns in the area (neighboring properties have sold for much higher than their asking price in recent years and we are constantly receiving mail from investors interested in buying the property).

The property is in need of extensive renovations, a majority of which seem to be cosmetic (kitchen, bathrooms, flooring, etc.), meaning that there is significant potential in building equity by buying the home and doing these renovations and attaining a high ARV.

I will most likely have the opportunity to purchase the place in a direct below market value. I'm in a predicament and I'm not sure how I should move forward when the opportunity to buy the place presents itself. Although it will probably be out of my budget range as a beginner investor, I'll do what needs to be done to come up with the funds as I am confident that after it is renovated I will have built a considerable amount of equity in it. The question is what I would do with it after that. 

I am uncertain as to whether or not I plan to live in this area for an extended period of time, meaning that I would rent it to produce monthly cash flow. I would classify the neighborhood as upper-middle class, and it doesn't appear like there are a lot of renters in the immediate area, so I am unsure if there really is a market for it (although, again, it's a very desirable location). Does anybody have any recommendations as to how I can research the "rentability" of the property? 

I could possibly consider a flip after equity is built from forced appreciation, but as with renting, there comes an ethical issue; my grandparents have lived here nearly 50 years, and I'm not sure that my family members would be too thrilled if I were in it to make a quick buck. One family member, who lives in SoCal, recently expressed to me his interest in doing "whatever it takes" to keep the home in the family.

Hoping that some experienced investors can provide a few words of advice as to how I may plan to move forward. Feel free to ask questions, I can certainly provide some more detail if necessary. Thank you!

[Dan K.]

Hi @Max K., welcome to BP. Spend some time thinking about what @Jonathan Greene said r.e. emotions and investing.

I can give you some General and Boston specific thoughts:

- Rentability completely depends on the town. Newton for example has single family homes for rent. They're expensive, but they don't come close to the 2% rule and likely not even 1%. These rentals aren't really investments, unless you are chasing appreciation. Instead they basically cover expenses until the homeowner moves back or decides to sell.

- Items like kitchens and bathrooms aren't just cosmetic. The budget can obviously quickly climb.

- If family members would be upset if you sold the property for a profit do not purchase the property. If you are considering this as an investment, you can't go into it taking one exit strategy off the table.

- Think about taxes. There are lots of details that you can research. When you sell your home, the capital gains on the sale are exempt from capital gains tax. If you are single, you will pay no capital gains tax on the first $250,000 you make when you sell your home. There are lots of exemptions. But if it's your primary residence and you fix it up and sell it you might be able to keep your capital gains tax free. If you fix it up, rent it for 5 years, and then sell it you will need to pay capital gains on the difference between your purchase price and what it sells for (there are strategies to minimize or delay the payment -- you can look into 1031 exchanges).

- You talk a lot about equity. Equity is great, but you are just starting off your investment path. If you have tons of equity in the property but can't access it, it won't really be a huge benefit. Let's say you have $500,000 of equity. You can certainly keep that in the house, but if you want to fuel other investments you are going to want to unlock that equity. To unlock the equity you are going to need to either (a) sell the property, or (b) get financing through a cash out refinance or home equity loan.

Bottomline -- The best way to make money in real estate is to purchase properties below market value. You have the opportunity to do that. However, there is a lot more at play. What will the family dynamics be when other family members find out you bought it below market value? Will people feel like you fleeced grandma? What gives you the "right" to get this sweetheart deal over others? Those are all things that you are going to need to decide how to handle -- nobody on BP knows your family dynamics. If you can figure out the family part, then it's an awesome opportunity to get into investing. You can even house hack by renting out rooms -- either find roommates or do short term rentals.