How to leverage a $1,000,000 home in South Pasadena

[James M.]

My in-laws are currently living in a paid-off home in South Pasadena worth around $1,000,000. They have expressed the desire to move to a bigger and cheaper house a little further out, and were curious about what they can do with their existing property. Ultimate goal would be to finance their new property and an additional property for us and our two year old. They are semi retired but probably have about 5-10 years of income left. Ideally there would be a way to work some cash flow into this deal to offset loans or ultimately provide an additional source of income for them in their retirement.

Having poked around on BP for a while and listened to copious podcasts, I have come up with a rough strategy:

1. Get home equity loan on existing property for around $300-$400K
2. Use loan money for 20% down payment on two properties: one SFR for them somewhere cheaper in the SGV like Rosemead or El Monte, and one multifamily for us to house-hack within 30 minutes or so of downtown (El Sereno, Highland Park, USC area, Inglewood?)
3. Rent existing South Pasadena home for around $3000 to support new mortgages and home equity loan payments
4. Refinance new properties after a few years to pay off original home equity loan (at least partially)
5. My partner and I move into original South Pasadena home after a few years to take advantage of good public schools, while the in-laws receive income from now fully-rented multifamily.
6. Profit

Is this naive? A little more info, my partner and I currently make around $140,000 combined and have roughly $30,000 in savings. The in-laws make around $70k combined and have around $50,000-$100,000 in savings.

As an alternative strategy, what if the home equity loan is used to finance a new house for the in-laws, as well as a handful of multifamilies in a place like Bakersfield, that produce more cash-flow than we would get from a triplex in LA? My partner and I could then continue renting our current apartment. After a few years of receiving cash flow from the multis, and perhaps borrowing against them to acquire more income-producing properties, we could eventually move into the house in South Pasadena to take advantage of the schools, while the in-laws would get to retire on the cash-flow from the multi-families. This option seems to carry more risk, or at least effort. One advantage is it might help us avoid a potential dip in the LA market in a few years if the multi-families are in a more stable area undergoing less speculation.

We'd really appreciate any input you guys might have. It's been really interesting to learn more about real estate investing, and I'd like to help out the in-laws as much as possible. Best case scenario, this could snowball into financial independence for everyone involved. How can we put this house to work?