What would you do?

Question

I have not been very active on the Bigger Pockets Forums lately due to some personal experiences.  My mother passed away in April, 2010 and since she was my father's caregiver, I had to quit my job in Colorado and move back to California to care for my dad, who had Alzheimer's.  My father just passed away in February of this year, and now my sister and I are trying to settle the estate, which is a little messy but fun nonetheless.

My question is this, my dad owned three separate properties in Southern California that I just don't like.  One is a SFR, one is two SFR on one lot and one is a five plex.  The main reason I don't like them is their age, the five plex was built in 1925.  The other two are over 60 years old.  The last six houses I have purchased were all built after the year 2000.  I can probably sell them for 150-200 times the monthly gross rent.  But I will also incur some serious selling costs and then some buying costs on the other end.

I don't want to make any rash decisions as dad has been gone less than 90 days, but I do need to start making some plans on what to do.  One nice thing is that I don't need to worry about a 1031 as the properties will be reassessed.

I think there are a lot better opportunities out there and that these three properties are "weak equity" and should be doing much better for me.

I would love to hear your ideas.

Don Konipol · Answer

I would place $750K in low LTV private mortgage loans yielding 12% and up and $750K in income producing real estate with short term leases than can be adjusted quickly should high inflation become a reality.

Bill Gulley · Answer

I have to say setting aside part for your own banking is sound IMO. I also agree with Don, again, without any buts.

Lending is IMO more profitable than most other ventures at the end of the year with much less sweat or brain damage. Those funds can be spent away or they can then be used to buy decent notes at a discount, which is where the real bucks are, I hit 24, 30 and 40+ (actually a few times in the hundreds after refinancing them)
 returns easily on discounted notes. This can also be set up as a passive investment and fund retirement as well. The closesest thing I ever came to, to shooting fish in a barrel!

I had similar thoughts years ago and I chose not to be a landlord for ever, I don't mind calling on the phone, I'm just not going through having to manage a PM, much less clean outs and taking applications! I also say do what ya know, but notes are sweet!

Rich Weese · Answer

Mike,

I guess I would join the chorus that has said to sell the properties, but my reasons are different. I don't like California, and I don't like properties that are 100 years old.

I prefer your current process where you are buying newer homes in an area that you are familiar with.

The comment from Don about using part of the money to loan out was also interesting if 12% plus can be obtained. Of course, it also depends if you're looking to increase your cash flow with money that will be worth less each year, or whether you're trying to increase your real estate holdings which hopefully will be worth more in value each year.

Again, I join the others in extending my sympathies for the things you've gone through the first part of this year. You are always missed on BP. Good luck. Rich

Joel Owens · Answer

You can go after multifamily buildings that are at 50%.Buy with cash and turn around and hold long term for cash flow.

You can refi the equity out tax free to pursue more properties.When 50% occupied you can turn around some rentals with cash coming in.Multifamily short sales are good because generally by the time a bank takes REO it is vacant or near vacant and too much damage has occurred.

For example buying a property of 100 units that is 50% occupied and paying say 10,000 a door for 600 in rent and needing 3,000 a door in repairs is better sometimes than buying a completely vacant property for 4,500 a door but needing 12,000 a door in repairs with no income coming in.

With your 5 unit built in 1925 how much land is that?? How much land do the other properties have?? Do any of the properties have  a view.Example with the houses someone could demo the house and rebuild to take advantage of the view.

The 5 unit maybe it could be scraped and a higher density could be built on the land (more stories or spread out more).

Mike you need a broker with a land development and income background to help you figure out the highest and best use for holding the current property,changing the current property,or selling the current property.

Jeff S. · Answer

Don't know if anyone has done this but you might consider creating an entirely separate portfolio whereby you can keep track of how well you do w/o help. Sometimes people that come into money have confusion about things.

You could use this money as a bank for your own purchases plus make hard money loans.

Starting small with a new venture would be what I'd do but that may not be your style.

Will you quit your job to pursue your investing and create a business from this?

Brian P. · Answer

Mike

My Scottish blood says thrifty is a good word, but I generally use careful to describe my wallet. Tightwad was one of my uncles, if he owed you a dime he would offer it but it was like trying to remove it from a vise when it was in his hand.

It would be OK if I was all Scottish but half of me is Danish so a lot of conflict when it comes to money.

Mike McKinzie · Answer

Brian, the term is "thrifty", not "tightwad!"  ROFL  It sounds like your sister's husband and my sister are two peas in a pod.  Reminds me of the movie, "Brewster's Millions" where he has to spend $30,000,000 in thirty days and have nothing to show for it.

Brian P. · Answer

Just sell them, no advantage to wait, selling expenses, yes, don't be such a tightwad, they aren't going to go away if you wait. The money will produce more money if your any good at what you do and now is still a good time to do it.

Oil and water, been there done that, just get your sister her half and stay on good terms with her. In my case she got her share and rather then join us in our ventures her whiz of a husband took over control and parlayed her share into a big pile of nothing.

Loc R. · Answer

If I were given $1.5M in cash and was 50+ and needed to preserve my cash flow, I would do what I know best.  In your case, it's (out of state) rentals.

Cash is king in this market, so I'd look for distressed sellers of income property; perhaps someone with a portfolio of rental SFRs or MFRs.  Or you could sit on your cash and buy distressed rentals one at a time - it depends on what the typical price point of each rental unit costs you.

Mike McKinzie · Answer

Two of the properties lend themselves towards Owner Occupancy which is why they would be better to just sell and head towards what I like, which is out of state, newer properties with decent returns.  As for scraping and rebuilding, I discussed that very thing with my PM company and they said brand new buildings would rent for the same amount as the 1925 building so why go through the hassle!

I had all the properties appraised upon mom's passing two years ago and these three totaled $1,300,000 in value.  Current gross rents are $8,645.  I know nearly everyone on BP would do a lot better than that with rentals.  Plus, I think I could get closer to $1.5 today but I am still waiting for the new appraisals to be done.

If we sold them, I have considered becoming a hard money lender to see if I like that aspect of real estate.  I have ONLY known rental and long term resell.  If I were younger, I might consider flipping, but I don't have the contractor resources to really know what I am doing.

But I want to separate from my sister with all investments.  She and I are like oil and water, we are just fine as long as we are not combined!

So I guess my question is this, "If you were given $1.5M in cash today, what would you do?"  Remember, I am over 50, have six children with three still at home (college age), and need a good monthly cash flow.

My goal for when I really retire is to have a six figure monthly income.

What would you do?

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