Investing in rental properties with a parent?

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Investing in rental properties with a parent?

James Phan
Member since 2021 · 8 posts · 2 votes

Hello all, this is my first post on the forums and I'm brand new to the whole real estate realm. Looking for suggestions on what you would recommend going forward in this situation.

Background

I am moving back to my home town of Las Vegas to help take care of my elderly, disabled mom, who is becoming more dependent for daily activities and no longer able to manage finances independently. Quick info on me: I am 30, married, stable health care job, very frugal, spend about $3000/mo combined with wife, currently at Coast FI through VTSAX and cryptocurrency, but absolutely ZERO real estate experience, including no primary residence because I have worked exclusively travel contracts. My dad passed away a few years ago and left his assets to my mom, which currently includes 3 SFH (1 primary residence + 2 rentals) all paid off, about $1.3mil in equity and $3300/mo gross rental income + some stocks. In the past, I have helped my mom invest her stocks, but she had been dealing with the rental properties. Unfortunately, it was my dad who was the finance guy and managed all the rentals and my mom does not have as much financial literacy, has tried to outsource most of the management to a property manager and would rather not do anything with management at this point. Additionally, she is used to the lifestyle that my dad used to provide while he was still working and she currently spends about $6000-8000/mo (a lot of which is also medical expenses for chronic conditions), so she withdraws from the stock portfolios to supplement current spending. From my calculations, she would deplete her stock portfolio with current spending in less than 7 years, which then her plan was to start selling off the homes. I believe that if she were to continue down this path, she would obviously run out of money.

At this point, my mom is also willing to have me take over the rental properties and/or use these properties for leverage to increase our wealth so that she does not run out of money and so that I do not have to support her with my own W2 salary in the future; thus, I am wondering what would be the best way to proceed with the least risk? 

TL;DR

Mom has 1.3m in equity, willing to do joint-mortgage or joint investments for real estate. I am taking care of her as far as daily expenses (groceries, transportation, etc), so looking to leverage her current investments to increase wealth. Being a complete newbie, what should I look into as pro/cons/risks for this plan going forward?

- HELOC vs home equity long vs cash out refi?

- how would potential lenders view the situation?

- potential risk of partnership? We both have 800 credit score, I would handle all mortgages and simply pay out 50/50 or more depending on her bills

- least risky investment? I was thinking SFH buy & hold in our backyard of Las Vegas, rent by room to travel nurse/professionals or potentially Airbnb in Henderson (Airbnb potentially becoming legal in Clark County in July 2022)

Thanks in advance!

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y

@James Phan

No worries. That makes more sense. 

I increased rents between 10 & 30% on 7 vegas properties last year. One tenant responded that she was worried I would raise rents again within a year. (I switched her to MTM at the same time.) when I said no the increase would be good for at least 12 months she signed the same day. The other 6 were given 75 days notice (I believe that’s the new law instead of 60 days but I like people to be prepared either way.). All ok’d the increase within 3 days. 

Nobody is moving over $50/mo if you’re at market, it just ain’t worth it. So I would say if you increased rents to $100 under market, say $200/mo each, you’d get instant acceptance. Then you’d have another $400/mo for moms expenses. 

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    Your situation is similar to my mothers except her health is better. 

    Unless your mom is only in her 40’s she has enough to last the rest of her life and while it’s not ideal it may be the least risky. She’s currently spending about $3,000 more than her rental properties are bringing in. And you think that will last 7 years. So we assume about $250k in stocks (84*3k). So 7 years from now you sell one property (hopefully most equity and least cash flow but let’s use average.). She sells a $400k equity (which has hopefully doubled in 7 years but let’s pretend the market stays flat). Now her cashflow drops to $2k (ps. There is no way $1.2mil over 3 houses  in vegas should only be cashflowing $3k, it should be $4,000+ in its sleep, which would extend all these numbers 30%, but again let’s assume worst case scenario.). So she spend $4k per month more than she’s making and that carries her another 8 years ($400k/$4k/mo). So you’ve got 15 years covered. 15 years from now, you have zero appreciation and zero rent increase and you still haven’t increased the Chas flow to where it should be today. She sells another property and now needs $5k/mo from that $400k sale that carries her another 6.5 years ($400k/$60k/yr). So now we’e 21 years into the future and the properties still haven’t appreciated (they should have doubled or tripled as should the rents, but again, worst case.) and she needs the whole $6k from her $400k sale that carries her another 5.5 years. So you made it 26 years with zero appreciation and zero rent growth. Realistically you should be able to make it with zero sales by raising rents and increasing cashflow. But if you have to sell appreciation should have at least doubled by the time you have to sell giving you a 52 year plan. Taking out additional loans just crushes her cashflow and that’s all you’re worried about. 

    I would ask the current PM about raising rents (they’re up 20% this year alone, so unless her cashflow was only $2500/mo last year, she’s under market.) same thi with your equity estimate. If it’s more than 3 months old it’s at least 10% low. 

    Good luck with whatever you choose but sometimes low risk low return is the right answer. You don’t want to be the reason you have to support her when doing nothing would have been fine. 

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  • Dwayne Poster
    Investor · Van Isle · Member since 2021 · 455 posts · 226 votes
    4y

    are you the only child?

    I would look at the broader estate, starting with a living and final wills, and who executes. Then how the estate can grow while managing tax implications.

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  • James Phan
    OP
    Member since 2021 · 8 posts · 2 votes
    4y

    Hey @Bill B., I’ve actually read through a lot of your insightful comments, especially in the Las Vegas market, prior to making this post, so I appreciate you taking the time to respond with such detail. 

    I wanted to clarify that the 1.3M in equity includes a primary residence, so she is only renting out 2 SFH - one in East Vegas for $1550 and one in SW for $1750. Looking at Zillow rent estimate/rentometer, it seems like they are grossly under rented for the areas. My mom told me that she has basically kept the rental prices the same since my dad passed in 2018 despite PM telling her to raise the rents because they were long term tenants and she didn't want to worry about vacancy. The current tenant's lease for the SW home is up for renewal in March, and the average rent in the SW area seems to be above $2000. Obviously, I think that should change, but what should I expect if we go about increasing the rent? Are there laws in Las Vegas against such an increase in rent?

    Additionally, I appreciate all the math and calculations that you’ve put forth as they put a lot of things into perspective for the future. I guess I am just split into two sides. A part of me understands the low risk tolerance someone like my mom would have and I don’t want to ruin what my dad had already built financially for my mom/our family since I have no real estate experience, but the other part feels that it would wasteful to see my mom burn through what she has left without preserving/creating more wealth with what my dad had already started. 

    1Reply
  • James Phan
    OP
    Member since 2021 · 8 posts · 2 votes
    4y

    Hey @Dwayne Poster, I am not an only child and also have a brother, but both of us have pretty much been hands off with our parents’ finances. My dad was pretty much doing the real estate thing on his own, supporting my mom with his W2 and rental income, but unfortunately passed away unexpectedly and we did not get a chance to learn the real estate game from him. I know my parents having a living will and such established, but I’ll have to look further into the details. Any pointers on where to go/where to look for more information for estate management?

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    @James Phan

    No worries. That makes more sense. 

    I increased rents between 10 & 30% on 7 vegas properties last year. One tenant responded that she was worried I would raise rents again within a year. (I switched her to MTM at the same time.) when I said no the increase would be good for at least 12 months she signed the same day. The other 6 were given 75 days notice (I believe that’s the new law instead of 60 days but I like people to be prepared either way.). All ok’d the increase within 3 days. 

    Nobody is moving over $50/mo if you’re at market, it just ain’t worth it. So I would say if you increased rents to $100 under market, say $200/mo each, you’d get instant acceptance. Then you’d have another $400/mo for moms expenses. 

    1Reply
  • James Phan
    OP
    Member since 2021 · 8 posts · 2 votes
    4y

    @Bill B. Thanks for showing your real life examples. I used these examples when I had a talk with her today and she just didn't realize that the market was going up so rapidly. She also told me that our tenant in the SW home may be leaving to buy her own house, so that brings me to a question.. May I ask if you rent out any of your SFH by the room, either to travel nurses, construction workers, single professionals? My background is actually in travel healthcare and my wife and I typically rent by room/ADU in California on contracts. I'm just wondering if the same concept could be applied to the Vegas market or if it's not quite as common here. Previously, my parents have always rented to families.

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    You have to live in the the property to do short term rentals in vegas. I haven’t done by the room since I first got in to real estate back in the 90’s and didn’t want to pay rent when I moved out of my parent’s place. 

    I don’t think there’s a market for traveling construction workers as anyone looking for a tax break (the big jobs) have to hire locals. My wife was a nurse at the county hospital until she retired last year. They aren’t as common as other states IMHO. Even in a large hospital there might be 10’s of them. MAYBE if your property was within a few blocks of a hospital.

    The low turn over is really the advantage of SFH in vegas, 4-10 years is pretty much the average. If you were just getting started and the only way you could afford a place for yourself was househacking I would suggest talking to friends/co-workers about living with you. Otherwise I'd stick with LTR of the entire home, especially if you're trying to make the property like an annuity.

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  • Michael Robbins
    Property Manager · Henderson, NV · Member since 2018 · 501 posts · 317 votes
    4y

    @James Phan as part of your calculations and weighing options I would also include an analysis if the current rental properties are at market rent.  You might also consider making some improvements to the existing rental properties to see how much more income can be generated before making any moves. I have come across situations where rental properties are well below the market rate or are not at the maximum potential.

    0Reply
  • James Phan
    OP
    Member since 2021 · 8 posts · 2 votes
    4y

    @Michael Robbins I appreciate your suggestions regarding my situation. As it turns out, my mom has not kept up with the market rent and has been charging the same rent since my dad passed away in 2018! Obviously, it is grossly underrented for the area at the moment, but would you consider https://www.rentometer.com/us/... to be a good comparison for the Las Vegas market? 

    Also, as it turns out, my mom's tenant is planning to move out after her lease expires end of February. I have not seen the property myself, but my mom says that it is mainly original from 2005! I thought that this would be a good opportunity to do renovations and also consider other rental models, such as furnished rental through Airbnb/travel nurses. May I ask what improvements you'd suggest I look at first that would maximize income? Also, given your experience as a property manager, may I ask your views on renting a SFH traditionally as a LTR versus medium term/month-to-month on Airbnb (30 day minimum)/Furnishedfinders?

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    @James Phan

    I’m pretty sure, if the property is in Las Vegas you won’t be able to put it on Airbnb unless you live in the property (and rent out rooms) and there are no others within 600 feet. You can still do rentals over 30 days but I think you’re really just buying yourself a job over just doing long term rental. 

    0Reply
  • James Phan
    OP
    Member since 2021 · 8 posts · 2 votes
    4y

    Thanks for the quick response @Bill B.! It would definitely add in a lot more work for myself versus just going through the LTR route with my mom's current property manager, but do you think it would be worth the hassle and/or provide a valuable experience for a newbie like myself to manage the property?

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    If you have the free time and nothing better (financially or emotionally) to do with it. Maybe?

    The passive portion of real estate is what attracted me. My first 20 years of work I was “the guy” the business didn’t run without me. If I wasn’t working I had to be reachable. The last 15 years have been about doing what I want when I want. When my family needs help out of state I’m on a plane the next day and I stay until they are better. The freedom was always the reason I worked hard and invested the money is a by product. 

    That being said. If your job is flexible and you have the free time and you’re in a position where an extra hundred or two a month is life changing money then certainly do it, at least as long as you have to. GL either way. 

    0Reply
  • Phillip Dwyer
    Real Estate Agent · Henderson, NV · Member since 2011 · 1k+ posts · 550 votes
    4y

    @James Phan You're getting a lot of great insight here.  I'm guessing you do well at your career.  If that's the case, I would put most effort into maximizing the earning potential from your career instead of trying to run an airBNB business.  

    One thing you have talked about yet is the likelihood that there will be a ton of deferred maintenance on these houses.  I've found that when properties are rented under market for long periods, typically the same landlords are not keeping up on maintenance.  So you'll want to get your eyes on those houses asap to figure out what capital expenses are coming your way. A tenant turnover is the perfect time to get those done and to improve for better rents.  

    As someone else mentioned earlier, I'd recommend getting some estate planning done very soon.  It's a lot easier to do now when your mom has her faculties then when it's too late.  

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