How might I leverage friends, family, or folks' inheritance?

Question

Would love for some creative and knowledgeable folks to engage with this scenario and brainstorm any potential solutions. In other words, please take a look at the "ingredients" below and help me figure out what different options might be cooked up:

A husband, wife, and their 2 young children currently renting an apt. in SoCal want to:

1. own, or co-own a duplex, triplex, or quadplex somewhere in the San Gabriel, San Fernando, or Santa Clarita Valley (and if not that, then they'd like to at least stay in LA County). They would live in one of the units.

Or

2. purchase an investment property (that they won't live in). If in CA, then probably some place like Bakersfield or Fresno. If out of state, then probably TN, GA, or other affordable market.

Some stats on their situation:

*Neither have previously owned a home*She: W2 part-time; He: self-employed*Combined income very low. Don't prequalify for anything in the area, but have excellent credit score*Together they have more than $100K in savings*His parents are also looking to buy in the area. They are seniors with very little income other than social security. However, they have more than $500K in inheritance money, and are eligible for a reverse mortgage. Their pre-qual has them looking at properties below $800K. *His parents are excited at the idea of co-purchasing a duplex, triplex, or quadplex and living in it with them (at whatever arrangement would make sense).*On the wife's side, her father has had decent success in the past from buying and selling several properties in the LA area, and he is willing to partner financially (or even just give a loan) on an investment property.

*She: W2 part-time; He: self-employed

*Combined income very low. Don't prequalify for anything in the area, but have excellent credit score

*Together they have more than $100K in savings

*His parents are also looking to buy in the area. They are seniors with very little income other than social security. However, they have more than $500K in inheritance money, and are eligible for a reverse mortgage. Their pre-qual has them looking at properties below $800K.

*His parents are excited at the idea of co-purchasing a duplex, triplex, or quadplex and living in it with them (at whatever arrangement would make sense).

*On the wife's side, her father has had decent success in the past from buying and selling several properties in the LA area, and he is willing to partner financially (or even just give a loan) on an investment property.

*The husband has some friends and contacts who have invested successfully as landlords, and who would like to partner with him on potential deals. One of them has plenty of capital, and wants to work with him on finding a property "to buy low and sell high."

Nabil Suleiman · Answer

@Jonathan Vince

Hi Jonathan.

I think your questions are great and are a very common thing to think about when deciding on how to go about your investment choices.

I don't think any of the above choices are bad decisions and ill brainstorm along with some recent clients I have helped in similar scenarios.

1. Clients purchased their first cash flowing quadplex outside of Los Angeles (near Joshua tree), and later purchased a duplex in Riverside which they live in now. Their number one goal has been cash flow from the getgo. They have sacrificed living in Pasadena (where they want to live) for the short term, as they build their portfolio, equity and can purchase closer to where they want to live.

2. Another pair of clients is making their purchases in an area with good school systems because their kids will be entering school soon and private school near us, is a large budget in itself. Their first purchase had a separate living area detached in the back which they used for their parents to move into and sold the parents property to invest in cash flow properties.

3. Utilizing an FHA loan or a personal residence loan on a duplex- quadplex can be an advantageous way to grab a small multifamily while utilizing equity to make other investments. Just keep in mind that triplex and quadplex will have different loan expectations relative to the income the property makes and how much you will need to put down to acquire it.

Every investor I have met has their reason why they invest in the areas they do, so that would be the first thing the husband and the wife should talk about, and then look deeper into the investments they want to make that will take them closer to that goal. Having a family with kids to put in school can dramatically change the decision someone makes vs a couple without one or an investor that doesn't mind investing out of state.

The other thing I would suggest is to come to an investor meeting to meet like-minded people, where you can engage in conversation with things you want to accomplish and the means in which you hope to accomplish them.

Christina has a meeting next Thursday in Pasadena. if you look for FIBI Pasadena or I can send you the info if you cant find it.

Either way, good luck and I hope this helps.

Christian Bachelder · Answer

Hi Jonathan,

Always fun to brainstorm with other hungry investors. Here is my take:

1. own, or co-own a duplex, triplex, or quadplex somewhere in the San Gabriel, San Fernando, or Santa Clarita Valley (and if not that, then they'd like to at least stay in LA County). They would live in one of the units.

I have brokered a number of deals in all three of these locations and have to say, I think the best bang for the buck is definitely in the Santa Clarita Valley. This the typical "house-hacking" strategy of living in one unit for free, but keep in mind a good tenant and good market rental price of the other unit can make or break this strategy. Duplexes in all three areas are definitely priced high right now though.

Or

2. purchase an investment property (that they won't live in). If in CA, then probably some place like Bakersfield or Fresno. If out of state, then probably TN, GA, or other affordable market.

This is a situation that I have chosen for myself and my fiance. I definitely feel it is smart to start young in building your schedule of real estate, and the areas you listed are some of the only ones left in CA that can still cash flow on a monthly basis. Even without the cash flow, breaking even means you now own a house for no monthly payments, if the rent matches the PITI + other expenses. With less income, (and not sure your experience fixing houses) I would recommend this option over the first. Capitalize on building equity by potentially linking up with a wholesaler and finding a good deal where you could refinance in the future and get your original investment back out of the property after some potential repairs. Keep in mind the holding costs though. Do not want to lose your capital, as that seems to be the point of strength here.

Some stats on their situation:

*Neither have previously owned a home

Shouldn't be a problem with most lenders. I am a mortgage broker and most lenders will require you to take homeowners counseling course before funding. Can easily be completed within a day. The lower reported income could also qualify you for some great programs such as homeready and homepossible as well.

*She: W2 part-time; He: self-employed

W2 is fine, as long as the part time has been consistent and will remain.

Self employed can be just as easy as W2 with a good mortgage agent. How long have you been working in the same field? Does income fluctuate much? These are important questions that can change the qualification process.

*Combined income very low. Don't prequalify for anything in the area, but have excellent credit score

Credit is good, but low income is tough in CA. That is why I recommend the purchase of a less expensive unit outside of the major hubs of SoCal. Use the rental income you will gain from that unit to further qualify for the next purchase. (Rinse and repeat)

*Together they have more than $100K in savings

This is your strong point. That would lead to some great LTVs on your loans. Could come in with a large down payment, do some repairs with the remaining capital, then refinance out the equity you have built in the property, all while having new rental income. Basically, BRRRR.

*His parents are also looking to buy in the area. They are seniors with very little income other than social security. However, they have more than $500K in inheritance money, and are eligible for a reverse mortgage. Their pre-qual has them looking at properties below $800K.

Income is not as important when you have that much in the bank, as most lenders will be willing to work with them. Although, I would have to look at their finances before I can recommend they take out a reverse on a property in that price range. Just because they can qualify for something, does not mean its a good decision. i.e 2008. While things have gotten a lot stricter, bad loans still slip through the cracks.

*His parents are excited at the idea of co-purchasing a duplex, triplex, or quadplex and living in it with them (at whatever arrangement would make sense).

This is a great option to utilize. If the parents have the extra income to help out with the qualification, option 1 is definitely back on the table as a good option.

*On the wife's side, her father has had decent success in the past from buying and selling several properties in the LA area, and he is willing to partner financially (or even just give a loan) on an investment property.

Same as above, this strengthens the financials.

*The husband has some friends and contacts who have invested successfully as landlords, and who would like to partner with him on potential deals. One of them has plenty of capital, and wants to work with him on finding a property "to buy low and sell high."

Once again, strengthening the case. It definitely seems like you have great resources to take advantage of. You are smart to be asking these questions and not just jumping at the first option that comes your way. Do you research, learn from your mistakes, expect the best, but stay prepared for the worst. Not finding a tenant, finding poor tenants, troubles during rehab, and holding costs can break the backs of many people who do not plan out their financials to have room for errors. Stay patient and soak up as much information as you can before you start.

Feel free to PM me with any questions you may have. Always happy to help young and hungry investors. Good Luck!

John Acheson · Answer

Great news that they seem to have credit and income covered.  I would make sure the adults have 750-800 credit scores, pay down all possible debt, then shop for the lowest possible residential mortgage for a 2-4 plex.

Then simply analyze 100 properties in the areas that they REALLY KNOW.  Pick the ones they feel best about that pass CAPs and cash on cash then make a few offers.

OR wait for this global trade war to shake out our economy, stay in cash investments and wait for a better opportunity down the road while pounding the pavement in alternative areas that they might now know yet.

Brad S. · Answer

For me there isn't enough info given.

First, What are their goals ...capital accumulation, build cashflow, combination of both, To own their property and reduce their monthly obligations (i.e. quad-hacking, etc) or?

They may want to own their own property so they feel secure in knowing what their payment will be (30 yr fixed loan) and be able to do with it what they want (i..e paint, repair, remodel, fixup), a place for their kids to enjoy, and enjoy all the benefits of ownership. As opposed to being at the mercy of a landlord raising rents and not being able to customize the home to their personal liking, etc?

What is their risk tolerance? Are they willing to put in the work to find properties out of state or a team out of state to help them? Or would they rather stay within relatively close proximity, so they could drive by their properties. (some investors have a rule that they will only rentals if they can drive to them within 60 minutes, etc.) It sounds like capital for investment properties isn't a problem with experienced friends willing to partner.

No one can choose what their goals are, that is up to them, but once those goals are clearer, then we can assist with creative ideas of how to get on the path to achieve those goals.

How might I leverage friends, family, or folks' inheritance?

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