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

Question

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:

• Get home equity loan on existing property for around $300-$400K
• 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?)
• Rent existing South Pasadena home for around $3000 to support new mortgages and home equity loan payments
• Refinance new properties after a few years to pay off original home equity loan (at least partially)
• 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.
• 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?

Sanjeev Advani · Answer

Hi @James M.

Welcome to BP!  Its a great place, and clearly you've been studying.  I do like your first strategy, but I think the second strategy would be more feasible, and heres why:

Option 1-

You start with $400K cash.  You purchase a properties in a cheaper suburb (assuming $400K purchase price, $80K downpayment) which would leave you with $320K.

Next you go buy a multi-family in one of the areas you mentioned (Assuming average $200K/unit and 4 units, which seems on the light side, $800K purchase price, $160K downpayment) which would leave you with $160K in cash.

- The problem I see here is that I highly doubt you would receive cash flow in this scenario.  If you put the leftover money into the deal, you may be able to create some monthly cash flow.  If you lived in one unit and rented the rest, that may offset your rent and increase your return possibly, but I don't know if you would want to live in that area as well.

Option 2 -

You start with $400K cash and put 20% down on your parents $400K house, which is an $80K downpayment, and would leave you with $320K cash.

You purchase in a cash flow market near you, like Bakersfield.  Average price per unit - $85K - Average rent - $800/month.  You can afford to purchase 3 units for $255K with average rents at $2400/month.  Even after expenses you will cash flow, and you can then re-invest that rental income.

- The only factors that would really make a difference in both scenarios are: what is your rent? (does it make sense to move into the property to lower rents and downpayment), and are you willing to live in the neighborhood you purchase in?

Hope this helps and sorry for the long response!

Feel free to PM me any time as well.

James M. · Answer

Thank you all for the wonderful detailed advice. This will help me lay out the options to the family and discuss next steps. I'll have to provide a little real estate education (based on what I've begun to learn on BP) to really make a solid case. Once I get a better sense of their appetite for risk I will probably reach out to lenders to see what's possible in the different scenarios.

I'm not sure how to reconcile the difference between cash flow and appreciation right now, but if they are about to retire cash flow might be an appealing idea. Personally I would be happy paying less than I am currently on rent ($1750), if it comes with some nice long term appreciation, and the potential for cash flow as equity builds up.

Thanks again, and I'll be sure to reach out once I have a better idea of where we want to go.

Nabil Suleiman · Answer

@James M.

Hi James,

Welcome to BP.

I enjoy the strategies you are thinking of utilizing, Here are my immediate thoughts below.

A) where your parents would like to live outside of South Pasadena. (Rosemead and El Monte are pretty different from South Pas, but as you look at things online, have them drive the neighborhoods and see which ones stand out to them the most. There are a lot of duplexes around San Gabriel Valley which could potentially work toward your goals. (especially the amount down and interest rate advantage of it being a personal residence)

B) Could the current market rent for the home in South Pasadena cover them renting a better place while still cash flowing and allowing you to make better investments with the equity you could pull from the house? You may be able to get them into an amazing walkable neighboorhood while paying 0 in rent and affording them a superior lifestyle balance, also possibly freeing their income to make stronger investments with you.

C) If the above makes sense you may have greater flexibility with the options you have with the multifamily you choose (or other investments that will take you closer to your Financial freedom number)

D) if your primary goal is immediate cash flow, CA is a difficult nut to crack for that with multi-families at the moment. You can look at rural areas, but if you plan on utilizing property managers and taking out a loan to purchase it, make sure the cap rate and your budget afford you the actual cash flow you are aiming for.

I think you are in a great position with numerous choices available to you. Please continue to use us as a soundboard as you narrow your thought process and get closer to your decision.

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

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