Need Advice on a Unique Investing Oppurtuinity

[John Mark]

Hello,

Before I begin this post I would like to state that I am aware of how lucky I am to be in the position that I am in. I have worked very hard in my own career and have been fairly successful but with regards to this opportunity it is pure luck and I am very grateful for that.

My parents own a home in Palos Verdes Estates in Southern Los Angeles County. Their home was purchased in 1992 for $900k and has appreciated to a current estimated value of ~$5 million. The appreciation is largely due to the location of the property which is directly on the edge of a 170ft cliff overlooking the ocean with stunning views of Catalina Island and neighboring cliffs.

Our family has always been relatively  comfortable, I was never hungry as a child and I never experienced stress or worry over my parents being unable to pay bills. That being said, our family was never one of those families that could spend money without thought. My parents spent nearly all of their savings on the down-payment of this house and my Dad was running a small manufacturing business that had more down years than up.

Now on to the situation...

My Dad retired a few years ago, but due to a few tough years for his company he will need to sell his house in 1 year in order to live comfortably for the remainder of his retirement. First and foremost this breaks my heart because I know how much he and my mom love the house. For this reason alone I am considering giving them money to live on each year so they can delay the selling of the house. But  aside from wanting to help my parents, I am wondering if this is actually a smart investment opportunity for myself.

Here are the numbers that I am trying to work through...

My sister and I would need to give my parents a combined $80k-100k a year for them to be able to continue to live in the house. And this would happen for a maximum of 20years (hopefully longer!). By the end of the 20 years the mortgage would be fully paid off (currently paying 2.5k per month, I'm not sure how much equity they currently have in the house).

At the end of the 20 years my sister and I would inherit the property, sell it, and split the money evenly.

If I assume the house appreciates 5% yearly (conservative compared to 6.5%over the past 28 years) then the house will be with about $13.3 million. During that same time we would have put in ~100k per year, which, assuming 10% return if invested in the stock market would be worth $~6.3 million.

Based on these numbers I would be looking at ~18% year over year return. And it would require little/no effort on my part. Does this make sense or am I missing something?

A few more things to note...

(1) The biggest risk I see is if the cliff erodes over that period of time, so I would likely want to get an inspector proceeding with this plan. (however, if they do find something wrong then it could greatly reduce the value of my parents home before they sell it, right?)

(2) California law states that all new property on the coast must have a path/walkway for the public. My parents house was built in the 60s so it does not have a path in the backyard. The backyard is literally a cliff that drops down to the ocean. Given that it is particularly rare I could imagine the appreciation rate exceeding the average market appreciation rate over the next 20 years.

(3) I am 29 years old right now. I have been lucky to have a good/stable career at one of the largest companies in the world. My job is secure and I believe I could afford to given them between 50k-70k a year for 20 years without  sacrificing my quality of life. 

(4) My parents only have enough money to stay at the house for 1 more year. They are not going to re-finance it and invest in rental properties right now. It is too risky to do with everything that's going on, and it will require too much of their time. My Dad is 73 years old. He would rather sell the house and live somewhere else than have to work on investing in real estate.

(5) I know I could also invest my 80-100k a year in real estate and likely make more than 18%return over 20 years, but doing so would not save my parents house and that is ultimately my goal. (I will be looking at investing in real estate on my own and hopefully at some point that money can go towards helping my parents even more).