Problem Solvers Only - REI Family Dilemma

[Timothy Cervantes]

Hoping this is the correct place to post this, forgive me if it isn't.  I'm looking for input or advice on the following situation.

My Father is getting older and it is becoming much more difficult for him to manage the 4 SFR's he currently rents. I have helped him over the years with the hammer and nail stuff and occasionally with collecting rent and dealing with problem tenants. Not until now have I ever had a close look at the financial end of his real estate investments. This past year he has not seen one DIME in rents for two units. He has been over extended and is currently facing the potential of losing his primary residence if he is not approved for any of the government programs associated to helping homeowners who are underwater. To top off the fact that he's underwater on his primary residence he is paying a 7% rate. DITTO FOR THE UNITS HE HAS NOT RECEIVED ANY RENTS ON. I am now his full on property manager (yay me!). I don't mind, he's my Pops and he depends on his units for living expenses (he owns two other SFR's free and clear). Pops is an immigrant and has worked hard to get where he is, not to mention finding time to raise a kick *** son. I am also using these experiences to bolster my REI street cred.

I have secured a tenant for unit#1 after having to evict the prior tenant I have just evicted (received judgement yesterday) problem tenant #2 and should have it rented rather quickly based on the interest gained on unit #1, they're right next door. I will also be in need of a third tenant for one of the free and clear properties. Pops doesn't follow any of the BP rules for landlords. NONE, doesn't know what NOI is and operates strictly from a GROSS RENTS perspective. So he's eating every bit of cash flow he has available when receiving 100% of rents.

What I'm trying to do is teach him some of things I have learned here and elsewhere to help him become a more financially savvy landlord.  My preference would be that he let me manage them in they're entirety and he can sit at home and collect checks.  Well, not really he still works six days a week at 70 yrs old.  "What am I going to do, sit at home and watch novelas (soap operas)?"  

Along with teaching him to be more financially savvy, I'm trying to figure out a way for me to get him out from UNDER Units 1 and 2 and into a more manageable rate.  The combined mortgages total owed is $140k which is about 40K above the current values.  His combined rents for these two are $1445, the mortgage is $1200.    He can not refi due to his credit being banged up pretty good. I'd like to purchase these from him and I think he could possibly gain MORE cash flow if we were partners in these properties vs. continuing to have the debt costs eat at all of his potential cash flow.  I'm working the numbers right now and I wouldn't have a problem with overpaying for the properties right now and would almost look at it as a gift or payback to Pops.  I'm trying to work the numbers right now to build a business case to present to him.

I'd like to purchase the property and put it in an LLC with 75/25 ownership in my favor, it would be my very first investment property. Not the sexy $50k wholesale commission or 200K net profit flip but hey, its about solving problems and potential long term win for me right?

I humbly request any input and further ideas from BP on what other actions I could take.  To add one more detail, if it came down to it he would give up his primary residence before giving up his investment properties.  Looking for problem solvers!  

[Michael Olesky]

Hey @Timothy Cervantes - sounds like a sticky situation, good on ya for helping your pop. I'm close with my parents also so I can relate to your eagerness to figure something out. I'm not clear on your LLC plan but if a new loan is involved your loan will be based on the appraised value not the price you are buying them for. Meaning you'll have to pay the difference (the 40k you estimate they're underwater) between appraisal and purchase out of your own pocket.

While I like your noble gesture of taking one for your dad, you might not be doing the best thing for him.  Consider this, you most likely will be setting your own financial progress back 10+ years taking on over leveraged property.  I'm guessing your dad would rather take the hit to his credit/finances in his twilight years instead of crippling his son's best working years and financial potential.  I don't know your situation, but two over leveraged properties on your balance sheet will most likely be a major road block in your future RE endeavors.

You might better serve him by purchasing your own investments that you can use cashflow from to support him while helping him get these investments in line until you can dump them.  In the meantime, you should get all the financials, minimize as much expense as possible and boost income as much as possible. 

Are the rents inline with market or can they be raised?  Shop the insurance policy around and see if you can get a better rate.  Could you put 2k into each unit and charge a bit more for rent over time?  Can the property taxes be contested? Do you have a large friend that looks like 'The Rock' to collect rent for you?  Every penny you can gain pulls you that much more out of the nosedive. 

Not really a solution to your situation but I wanted to share my thoughts on what I'd be thinking if I were in your shoes.  

Best of luck!

-Mike