All Forum Posts by: Jon Schwartz

@Dane Jutila, have you inquired with any insurers about an umbrella policy? This is a personal liability policy that goes into effect after the personal liability on your other policies (car or home) is exhausted. It might be more expensive than usual because your property insurance has no personal liability coverage, but it's a good route if it's available to you.

The reason is to finance the purchase and renovation of a currently uninhabitable home.

Hi BP!

I'm looking for a lender in Socal who has experience completing 203K and HomeStyle loans. Many lenders offer these, but few have closed more than one or two, if any. If you're one of the few with meaningful reno loan experience, please get in touch!

Thanks so much!

Jon

"Airbnb arbitrage" as in renting a home in order to Airbnb it? That's going to be pretty difficult in Los Angeles! LA has really strict short-term-rental rules.

@Don Fisco, this is a complicated endeavor, but most of my clients have complicated aims, and I love a challenge.

Firstly, you want to talk to a real-estate lawyer about the in's and out's of a tenancy-in-common deed. (I think I can get a solid referral for you.) A tenancy-in-common (TIC) is when multiple parties collectively own a piece of property and have assigned use of different units within the property. TICs are becoming more common in LA these days; they're like condos, but the structure is different.

I'm not a TIC expert, but from what I understand, adjusting the ratio of ownership is difficult. I believe the different parties can start at difference percentages of ownership, but to change those percentages, you'd need to create superseding deeds... which is doable... but this is where you need to speak to a TIC-experienced lawyer about what's possible and what the costs will be.

Forming an LLC would make adjusting ownership percentages easier, but I doubt you'd be able to get a loan. When you buy a property as tenants-in-common, everybody in the group is essentially combined to qualify for the mortgage. Between the four of you, you make about $510,000/yr, which will qualify you for a sizable loan. If you form an LLC, you'll have a new company with $0 of income. Good luck getting a bank to lend $1M to an LLC with $0 of income!

So, there's a structure through which you can do this (a TIC deed), and you definitely need to consult with a real-estate attorney who has TIC experience to understand how to go about doing this.

Now let's talk about what's possible with the numbers you've shared...

You presently have $640-840K for a down payment and a combined income of $510K. With that income, you should be able to borrow upwards of $2M. Add the down payment, and you're looking at a healthy budget.

Two problems:

You'll need to buy a fourplex or smaller. Once you get to five units, the loan structure changes (it becomes a commercial loan), and you won't be able to qualify with your collective income.

A fourplex means no rental income because your group needs four units, right? There is a workaround: ADUs! Multifamily properties are allowed two detached ADUs and a third ADU, if possible, inside the existing structures. So, without getting into the weeds, you could buy a fourplex, then build 2-3 ADUs for rental income. You have quite a bit of capital for the down payment, and I'd suggest allocated a chunk of it to ADU construction.

The second problem is finding a vacant building. It will be very hard to find a vacant fourplex in LA. If you buy a building with tenants, there are ways to remove them. Namely, I'm thinking of utilizing to Ellis Act to remove the tenants. The only catch is that you can't put any of the four units back on the rental market for a period of five years. If everybody's comfortable staying put for the next five years, you're good.

This remind me of another factor you'll have to keep in mind: Ellis Act evictions require 120 days' notice. That's four months. And you'll probably need to do some renovating to any fourplex you buy; that's another chunk of time.

So, in conclusion, this plan is doable. I believe the legal structure, financing, properties, and path to living in the building all exist. However, it will be difficult! It will be challenging to find a suitable property, then very challenging to go from opening escrow to, months and month later, moving in. You up for it?

Best,

Jon

@Daniel Barad, I agree that Rentometer is probably closest. I start with Rentometer. What you should do now is use Zillow and Apartments.com to make a list of comparable apartments and what's they're advertised for. Try to determine for yourself where on the spectrum your apartment falls, then list there. Take into account: bedroom and bathroom counts, square footage of the unit, whether parking is included, whether laundry in in-unit or not or nonexistent, central air vs. window units vs. nothing, and the general condition and age of the interior.

Good luck!

@Daniel Kim, with that budget, and you can definitely get close to $10,000/month in net cashflow in LA.

The strategy to pursue is ADU conversion. Are you familiar with LA's ADU ordinances? An ADU is an Accessory Dwelling Unit -- specifically, a garage or other structure converted into a living space like a studio apartment.

Houses can have one ADU and small multifamily property can have two ADUs (and more under certain circumstances).

Here's an example deal, one I was exploring with a client recently:

https://www.redfin.com/CA/Los-Angeles/624-N-Evergreen-Ave-90...

This fourplex has two large garages, each of which can be converted into a studio apartment collecting $1600/month in rent (with plenty of off-street parking still available for tenants). In the fourplex, three units are rented for $5600 total and the fourth unit, after a renovation, can rent for $2500.

Let's do some very rough math. Let's assume you don't take a loan.

Purchase Price: $1,299,999
Closing Costs: $25,000
Renovate unit: $35,000
Build 2 ADUs: $250,000
TOTAL: $1,601,000

The cashflow calculation looks like this:

Gross existing rent: $5,600
Gross rent from 4th unit: $2,500
Gross rent from ADUs: $3,000
TOTAL GROSS RENT: $11,100

20% Expense Ratio: -$2,220
Property tax: -$1,354
TOTAL EXPENSES: -$3,574

NET CASHFLOW: $7,526

So, about 3/4 of your $2M budget gets you to about 3/4 of your $10,000/month goal. It's doable!

Best,

Jon

@Michael Caldwell, definitely consult with an RE attorney. I can recommend one to you; she helped a client of mine buy a home that was financed by the buyer's dad. This is similar, except the financing is coming from the seller.

But from my understanding:

You'll still be taking title to the property. The sellers will take a mortgage on the property. So you'll own it, and they'll be acting just like a lender. If you don't make your monthly payments, they can pursue a foreclosure and take the property back.

It's a sale -- albeit one that's financed 100% by a non-traditional lender. So you tax basis will step up to the sale price.

Good luck! And congrats on what sounds like an amazing find!

All the best,

Jon

 I have no idea. You want to talk to @Abel Curiel!