Rental Property Investor · Anaheim, CA · Member since 2017 · 17 posts · 6 votes
Hi guys,
I need some advice from the pros on if and how I should try to grow my parents real estate portfolio. My dad invested in some real estate 10-15 years ago. He has 6 investment properties and his primary home. His investment properties are all single family homes in California.
He now has dementia and we sold his business and he and my mom are living off of the rental income. California though is so expensive that I want to try to create more streams of income with more properties. But I’m nervous to invest their money as I’m pretty new and an amateur to investing. I personally have one property that I purchased in 2017 that’s built some equity but I’m definitely an amateur investor.
So some basic numbers on these homes:
Total estimated value of all homes including their primary home: 5.8M
Total remaining loans on homes: ~900k
Interest rates on these homes range from low 3’s to mid 4’s
So two questions:
1) Do I need to cash out refi each individual home if I want down payment money or can lenders lend based on the entire portfolio?
2) Should I look into multi family or continue the single family route?
Any and all advice is greatly appreciated. Thank you.
Honestly, I'd talk to a good CPA or estate planner about starting to sell off some of the properties while trying to reduce their capital gains taxes. What they are bringing in vs what the properties are worth likely means you could put that money in a high yield savings account, reduce the risk and probably get as much in interest as you net with the rentals. Annual interest on $500K @ 5% is $25K per year. Plus do you have the time (and knowledge) to deal with rentals? You are likely going to have to spend more time helping your mom and better to enjoy the quality time you have left with your dad.
Go through each property and write out what it brings in, expenses, etc and rank them as to the one you want to get rid of first.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
2y
You are wise in being nervous and humble. Invest in what you know, in what drives your personal investment success, and what you have a passion for. Don't invest in real estate because your parents own real estate.
Your dad's net worth in excess of 5 million puts him in the top 1% of Americans...that's impressive. Hopefully, he provided guidance on how he wanted things handled.
Investor / Mentor / Contractor · Arcadia, CA Buying Out of State · Member since 2015 · 654 posts · 622 votes
2y
Navid, for sure you should be looking into multifamily and buying out of state. This is a no-brainer. While reading your post I was thinking "sell the Cali properties", but with 3-4% interest rates (and I'm assuming those are long term fixed rates) you will be best off to cash out refi (non-tax event) and use those funds to buy multifamily. So much more to say so DM for more.
Honestly, I'd talk to a good CPA or estate planner about starting to sell off some of the properties while trying to reduce their capital gains taxes. What they are bringing in vs what the properties are worth likely means you could put that money in a high yield savings account, reduce the risk and probably get as much in interest as you net with the rentals. Annual interest on $500K @ 5% is $25K per year. Plus do you have the time (and knowledge) to deal with rentals? You are likely going to have to spend more time helping your mom and better to enjoy the quality time you have left with your dad.
Go through each property and write out what it brings in, expenses, etc and rank them as to the one you want to get rid of first.
If he cashes out the equity, he's borrowing money at 7% or higher so that he can invest in real estate with loans at 7% or higher. How does that make sense?
EXAMPLE You cash out $100,000 of your equity and use this as a down payment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).
Key Numbers
Home Equity Loan Interest Rate: 6%
Mortgage Interest Rate: 7%
Rental Income: $3,000 per month
Expenses (management, taxes, insurance, maintenance): $800 per month
Income and Expenses
Monthly Rental Income: $3,000
Monthly Expenses: $800
Monthly Mortgage Payment: $2,000
Explanation
The investor earns $3,000 in rent each month.
They pay $2,000 on the investment property mortgage and $800 on other expenses.
This leaves $200 profit each month or $2,400 per year.
However, you have to pay $6,000 interest on the equity borrowed.
This leaves you with an annual loss of $3,600.
This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
2y
You should not cash out refi under any circumstances as @Nathan Gesner said. Why would you refi out of a 3% rate to a 7% to hold it? Makes absolutely zero sense and is some of the worst advice I have ever seen in my life.
You need to seek more guidance than the forums. You need an accountant and tax consultant and a real estate expert to sit down and put the houses in order of their value vs. their cash flow if you and your mom do not plan to go back to regular jobs. You start with the "worst" property and sell it and 1031 into something that makes more income. Start there.
I need some advice from the pros on if and how I should try to grow my parents real estate portfolio. My dad invested in some real estate 10-15 years ago. He has 6 investment properties and his primary home. His investment properties are all single family homes in California.
He now has dementia and we sold his business and he and my mom are living off of the rental income. California though is so expensive that I want to try to create more streams of income with more properties. But I’m nervous to invest their money as I’m pretty new and an amateur to investing. I personally have one property that I purchased in 2017 that’s built some equity but I’m definitely an amateur investor.
So some basic numbers on these homes:
Total estimated value of all homes including their primary home: 5.8M
Total remaining loans on homes: ~900k
Interest rates on these homes range from low 3’s to mid 4’s
So two questions:
1) Do I need to cash out refi each individual home if I want down payment money or can lenders lend based on the entire portfolio?
2) Should I look into multi family or continue the single family route?
Any and all advice is greatly appreciated. Thank you.
That's awesome that you want to keep investing and building that real estate portfolio. I can refer you to some lenders to start off that would give you some good advice and information. I would definitely recommend investing out of state as California is fairly expensive! Make sure you build a team of your CORE 4 in whatever state you invest in such as getting a reliable realtor, contractor, property manager, and attorney. I invest here in Columbus, Ohio and would be more than happy to answer any questions you may have!
Real Estate Consultant · Ann Arbor, MI · Member since 2022 · 462 posts · 251 votes
2y
Hi Navid-
To start, I am sorry to hear about your father's dementia.
It is fortunate that you were able to sell his business and he invested in 6 investment properties in California 10-15 years ago and he and your mother are living on the cash flow from those.
You now are thinking about expanding your father's investment real estate portfolio because California is so expensive to live for them but don't have the same experience and confidence being new to investing.
This is an honorable goal and you are right to be cautious and thoughtful.
You asked about whether you should cash out refinance each house or borrow against all houses to get downpayment for new properties. On this question, because the interest rates are so low on the existing loans, as you state, I would not do a cash out refinance as that would increase your interest rate and payment reducing your parents cash flow they are living on. Also, I would also not cross-collateralize the houses if a lender would even do a portfolio loan.
On your second question about multifamily, I would not jump to multifamily until you have experienced the common management problems with single-family as the expenses scale with the size of the property as well as the cost of mistakes.
I would consider getting Home Equity Lines of Credit (HELOC) on each property. This gives you the dry powder you need if a good deal comes along or unexpected expenses and you keep the existing low mortgage rates and do not increase your payment until you use the HELOC.
Consider how you could increase the cash flow on the existing properties and if you have the means to pay off one of the houses to increase the monthly cash flow that way. Also, have you considered moving your parents to a less expensive area and renting out the house they live in?
Investor / Mentor / Contractor · Arcadia, CA Buying Out of State · Member since 2015 · 654 posts · 622 votes
2y
@Nathan Gesner you are right to question my assumption. I meant for Navid to obtain a HELOC type loan without the need to refinance the current debt (I suppose if available but there is always a way). The problem I have with your assumptions is you are suggesting he buys a $400,000 property and gets $3,000 per month rents. That's not at all what I am currently buying. In his place I will buy a $400,000 property with $5k-$6k rents. This makes all the difference. For instance, not long ago I bought a 9 unit apt with two retail on first floor for $200k and at purchase the rents were $6400/mo. I now have it at $9k/mo (the rents were low), and I've done several like this.
You're asking the right questions, just don't forget about the tax aspect to creating additional cash flow. Unless you're in a place to do a 1031 exchange (which can have higher transaction costs, depending on the situation), there likely is a significant amount of capital gains to pay upon sale of a property for reinvesting, or if investing in alternate markets like stocks, bonds, CDs, etc.
If the real properties are held until a parent's death, there likely would be a basis step-up on the real properties, especially if they are community property since CA is a community property state. Depending on the health of your parents, waiting until a death, although grim, could wipe out significant amounts of capital gains. Also, I'm not sure what other assets your parents own and the size of their estate, but there is a major change coming to estate tax laws in 2026, that depending on the size of their estate, gifting may be something to consider while the exemptions are high, which comes with its own sets of pros/cons.
Finally, don't forget about the change in property taxes that selling and purchasing a new property can bring. Your parents likely have relatively low assessed valued due to Prop 13 in California. Most other states assess property taxes annually on the fair market value of the property whereas CA allows for this lower property tax payments compared to the FMV if the property has been held for a long time. Also not sure if retaining any of these properties after your parents die is something that you're interested in that requires property tax planning. A reassessment often can mean thousands of dollars additional a year in taxes, which is paid year-over-year into the future. You'll also likely want to make sure that your parents' estate plan is in order and doesn't create an unwanted tax situation after a spouse dies. If your dad has dementia, you may be limited in what can be done in that regard, but might be worth a look as well.
*This post does not create an attorney-client or CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
You are an experienced investor that found a few off-market home runs, probably back when the market wasn't as hot and there weren't as many new investors cashing out equity to invest in mid-west states. Even if you found a deal for $200,000 that produces $9,000 a month income, that's a complete unicorn that you probably found off-market. It's not repeatable for a new investor with zero knowledge or experience and I think it's irresponsible to encourage him to cash out equity and chase rainbows.
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
2y
That depends on the localities. Most California courts favored and protected tenants. In SF City area no landlord will want to touch investment properties again. Layoffs from high tech, homeless or squatters abound. Landlord foot the rent for 2 years to tenants who did not pay rent (well they paid 25%) to remain in place while tax payers foot the bill for reimbursement. Some have jobs act poor many now own new cars and go on vacation walked out richer than landlords. 1 saved enogh now own a house. Just got through an eviction case at superior court. Tenants 6 months late or not paying rent got 2 more months for free but had to vacate after lease expire. He still did not pay rent as promised to the judge got what he deserved.
So if you still want to pursue most units have a rental control cap. Expect tenants to stay there 2 months free if they default. Want to manage all 6 properties problem free? Good luck. Sam Shueh
That's a tough question to answer. You need to ask yourself, Do you want to invest and grow his real estate?
If the answer is yes, then the next question is what market do you want to invest in? Do you want to stay in CA? And then, what type of real estate niche?
Your dad built up almost 5 million in equity. That's amazing. If you refi, are you putting too much debt on these assets to continue to cash flow?
Investor · Pasadena, CA · Member since 2017 · 612 posts · 523 votes
2y
Sorry about your father's dementia. :(
As others' have said, it is smart to question what, if any, other opportunities there are with the portfolio. But, I think the smart thing to do is look at the actual #'s. What are the current rents, market rents, maintenance/capx costs and projections, what is the actual return on equity %, etc. That will give you a real barometer of the current situation.
But, the #'s are not the only consideration, at least shouldn't be in my experience. I have had properties starting with great returns, that I would've happily gotten rid-of at break-even a few years later, if I could. I would rather have quality properties, in good areas, that have good demand and general growth. Unfortunately, those typically don't have the highest # returns, but they do tend to have good appreciation over time and may have less "hassle factor."
And, as @Katie Balatbat mentioned the property taxes on those properties are likely far below current market values, which is helping the cashflow situation. As an example, if the sfr's were bought 10-15 years ago, it is likely they have at least doubled in value in that time. So, 2.9m assessments back then would double for any new purchases, including out of state. That is not a reason not to make changes, just something to put in the evaluation. In CA we do have a pretty advantageous property tax system, at least for the moment (LOL). Property taxes are 1% of assessed value + local abatements/voter indebtedness, etc. Usually that works out to be around 1.15-1.18%, or $34,220 (assuming 15yrs ago total assessment of $2,9m @ 1.18%). This would roughly equal to a trended assessment of $3.82m today or an estimated $45k annual property taxes currently. As an extreme example - if you exchanged all of the investment properties with the same assessment factors, that would equal around $68k in property taxes or almost an additional $2k per month!
That's not the only consideration, but it is something to think about. It is a lot harder to get into CA real estate these days, then even 10-15 yrs ago. And I have had an out of state rental property taxes increase 50% over a 1 year period!
I would also consult with a CPA, as Katie pointed out there are specific tax law changes coming up which would be good to know about.
I would also assess which properties you consider "good" rentals and if their are any "not-good" or "marginal" rentals. Maybe they are in good growth areas where rents and values seemed to increase greater than average, or maybe they consistently attract good tenants, etc. Then, you can consider possibly exchanging those that don't fit your goals.
In the current environment, I would be very cautious of making any sudden moves without fully assessing your current situation and returns. We are at very low affordability #'s which translates to higher values and with other stats, appears to suggest a relatively horizontal market with some dips for many years. That said, there are always opportunities somewhere and maybe multi-fam or other areas would be a good move. But, that requires analysis.
Also, there are many other investment opportunities with returns above what most real estate is offering now.
And, I think the assumption is that there are loans on ALL the properties? Are there any that are paid of and therefore a new loan on an exchange is moot?
And, and, since these properties are in CA, do any of the properties lend themselves toward adding an ADU and increasing the income potential. You may have easy opportunities to add income with some of the properties already owned.
I need some advice from the pros on if and how I should try to grow my parents real estate portfolio. My dad invested in some real estate 10-15 years ago. He has 6 investment properties and his primary home. His investment properties are all single family homes in California.
He now has dementia and we sold his business and he and my mom are living off of the rental income. California though is so expensive that I want to try to create more streams of income with more properties. But I’m nervous to invest their money as I’m pretty new and an amateur to investing. I personally have one property that I purchased in 2017 that’s built some equity but I’m definitely an amateur investor.
So some basic numbers on these homes:
Total estimated value of all homes including their primary home: 5.8M
Total remaining loans on homes: ~900k
Interest rates on these homes range from low 3’s to mid 4’s
So two questions:
1) Do I need to cash out refi each individual home if I want down payment money or can lenders lend based on the entire portfolio?
2) Should I look into multi family or continue the single family route?
Any and all advice is greatly appreciated. Thank you.
Sorry to hear about your Dad. It is a tough situation. First thing to consider is if the income from the portfolio and other sources is sufficient to meet your parent's expected needs. This is something you will likely need to continue to track. This could drive many of the decisions you need to make.
Second thing is to check your parent's estate plan and how the properties are titled. If it has not already happened, your parents need to form a trust and get the properties into the trust. Set up appropriate powers of attorney. You do not want to have to deal with the significant added expense, hassle, and delays of probate should one of your parents pass.
Consider using this situation to improve your "amateur investor" status to intermediate or advanced status. If it were me, I would be focusing on the details of the existing portfolio and not be in a rush to acquire new properties. Review the current loan documentation and verify that the interest rates are fixed and will not adjust at some point. Get a deep understanding of what the income and expense for the properties are and try to identify future capital expenditures that might need to be reserved for. If your parents don't have a current property manager, consider attempting to manage them yourself for the experience. If you do have a current property manager, meet face to face with them and find out the details of how they manage the properties with an eye toward improvement.
As has already been alluded to, you should think about what happens when one or both of your parents pass. Under current tax law, you should be getting a step up in the tax basis of the assets your parents own to current fair market value when one or both of them pass. If the appreciation is significant, this could be a lot of money at stake. On the other hand, with the passage of proposition 19 a few years ago, the properties will be reassessed upon death and that will result in higher property tax expense going forward.
Final thought: There are very few Californians who are happy they sold a property in the last 10-30 years. Most wish they had held on to them.
You are wise in being nervous and humble. Invest in what you know, in what drives your personal investment success, and what you have a passion for. Don't invest in real estate because your parents own real estate.
Your dad's net worth in excess of 5 million puts him in the top 1% of Americans...that's impressive. Hopefully, he provided guidance on how he wanted things handled.
Last I saw to be top 1% in net worth required over $12m net worth.
with over $5m it does not have to be invested optimally to be enough for your parents to live comfortably. Because of this, I recommend conservative, passive or near passive investments. Granted this approach may not create generational wealth, but it will provide your parents a safe path forward.
i would not be looking to expand their RE holdings. Too much risk and too much work.
Rental Property Investor · Member since 2018 · 826 posts · 810 votes
2y
@Navid Sadighi I’d wait until you can step-up the basis before doing anything else. You can consider doing a cash-out refi on one or two properties, but I’d also wait a while before pulling the trigger on that.
If you are inexperienced, just manage the properties as is for a few years until you learn how to manage rentals, and more importantly understand the fundamentals of investing (leverage, tax implications, opportunity cost, opex vs capital trade-offs, etc).
I also suggest talking to a few CA investors to understand CA investments vs non-CA. Most folks who suggest to invest in other states don’t understand investment fundamentals of high cost locations.
You are an experienced investor that found a few off-market home runs, probably back when the market wasn't as hot and there weren't as many new investors cashing out equity to invest in mid-west states. Even if you found a deal for $200,000 that produces $9,000 a month income, that's a complete unicorn that you probably found off-market. It's not repeatable for a new investor with zero knowledge or experience and I think it's irresponsible to encourage him to cash out equity and chase rainbows.
I'll agree with you that not everyone can do this as newbies. But I was a newbie once and I am doing these deals now. You are not correct about me just finding one unicorn. It's all about finding the right market at the right time and I've done this several times now. I actually have several deals like that one. The reason I mentioned it in this post is because it is actually something a newbie could be doing with the right training/mentoring. I turn down good deals all the time as I don't wholesale. I either buy myself, or help another investor buy.
I need some advice from the pros on if and how I should try to grow my parents real estate portfolio. My dad invested in some real estate 10-15 years ago. He has 6 investment properties and his primary home. His investment properties are all single family homes in California.
He now has dementia and we sold his business and he and my mom are living off of the rental income. California though is so expensive that I want to try to create more streams of income with more properties. But I’m nervous to invest their money as I’m pretty new and an amateur to investing. I personally have one property that I purchased in 2017 that’s built some equity but I’m definitely an amateur investor.
So some basic numbers on these homes:
Total estimated value of all homes including their primary home: 5.8M
Total remaining loans on homes: ~900k
Interest rates on these homes range from low 3’s to mid 4’s
So two questions:
1) Do I need to cash out refi each individual home if I want down payment money or can lenders lend based on the entire portfolio?
2) Should I look into multi family or continue the single family route?
Any and all advice is greatly appreciated. Thank you.
The first thing I recommend doing is removing the primary home value and debt from the calculations. And only consider how much equity and debt you have from the rentals.
Then start researching resources to potentially obtain a Line of Credit with the rental portfolio as the backing. A line you would only access if and when you find an investment opportunity that throws off a positive cash flow. Note I said an investment opportunity, not a real estate opportunity. The opportunity should be relatively safe and probably more focused on principle retention than over the top gains.
Bloomfield, NJ · Member since 2016 · 24 posts · 33 votes
2y
@Navid Sadighi
Nowhere in your post did I read that your parents desired, or were in need of more income.
Your father seems to have done a few things right in his lifetime. Let him enjoy it, and if you someday inherit everything, that's your chance to roll the dice. Not now.
If he cashes out the equity, he's borrowing money at 7% or higher so that he can invest in real estate with loans at 7% or higher. How does that make sense?
EXAMPLE You cash out $100,000 of your equity and use this as a down payment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).
Key Numbers
Home Equity Loan Interest Rate: 6%
Mortgage Interest Rate: 7%
Rental Income: $3,000 per month
Expenses (management, taxes, insurance, maintenance): $800 per month
Income and Expenses
Monthly Rental Income: $3,000
Monthly Expenses: $800
Monthly Mortgage Payment: $2,000
Explanation
The investor earns $3,000 in rent each month.
They pay $2,000 on the investment property mortgage and $800 on other expenses.
This leaves $200 profit each month or $2,400 per year.
However, you have to pay $6,000 interest on the equity borrowed.
This leaves you with an annual loss of $3,600.
This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.
