Opportunity, or not?

13 Replies

Hello everyone! I'm a new member looking for advice about an opportunity I've been given.

Due to my new job at a large mortgage lender, I started listening to BiggerPockets to familiarize myself with the real estate industry (math major, light underwriting experience, started with no real estate knowledge whatsoever). After 40-50 episodes, I decided I needed to read Rich Dad Poor Dad, The Richest Man in Babylon, etc. and also decided to give real estate investing a try.

My parents have fully owned a home in a more rural area of Southern California (imagine that Victorville is the closest "large city") for the past six years. It turns out, they want to move to somewhere more like Orange County and (when I asked hypothetically), offered to use the money from the sale of the house for a down payment on a 3- or 4-plex (or multifamily) so that I can get started in investing while they live in one of the units.

Is this a good idea? Any thoughts about business with parents/relatives?

Hi @John Son ,  welcome to BP!  

I think moving to a Multi-Unit is a great idea to get started.   Only thing is finding the right property.  I'm a Broker and run my own property management company here in Orange County.  We work with a lot of investors in the multi-unit space.   I can tell you a 4-unit in a "C" grade type of neighborhood (Anaheim, Buena Park, Parts of Fullerton, etc..)  will cost minimum $850k.   

If you decide to purchase a multi-unit, I suggest finding one that is currently miss managed and one where you can "add value".   Nothing major, but more minor to medium repairs/rehabs for your first one.  After you can raise the rents.   We work with investors that mainly focus on these types of multi-units where value can be added with not a whole lot of money.   

Are you able to qualify for a loan on your own? Have you thought about doing an FHA loan with the minimum 3.5% down? Since you or your parents are planning to occupy one unit. I checked today and the rates for a 3.5% down pay at 30 yr is 3%.

Feel free to message if you have any other questions.  I'm sure more people on here will chime in.  

Best of luck! 

Chris

Thanks @Christopher Suh ,

My dad and I have been on Zillow for the past few days and I've been trying to run numbers on some deals like I do at work, but there isn't enough information available on websites. I'm not too sure whether it's acceptable to call up an agent and request something like T-12 financials or a rent roll for multifamily, but I might?

Anaheim, Buena Park, and Fullerton all sound like places my parents would like to consider. I read the article on pre-qualify vs. pre-approval, but I'm still unsure whether I need to find the property first, or go to a lender first.

I believe my dad said he would speak to an agent and have their home listed soon, but there's also no way of knowing when we'd have the down payment (whether it be 3.5% or 20%) or how much. He also has some experience in construction work on homes so I don't think minor to medium repairs will be an issue.

Any suggestions?

Hi John,

I have found that Redfin does a better job of listing rental rates so you can run numbers than Zillow does. Have you tried that? I would try to sit down with your parents and an agent to get an estimate of what the seller net proceeds would be for the sale of their home (including loan payoff, estimated closing costs, commissions, ect). A local agent should be able to run a CMA for you to suggest a good listing price.

Once you have figured out what the net proceeds will be, you will have a good idea of what you and your parents could afford. From my experience here in Orange County, if you are only putting 3.5% down, your rents will be unlikely to cover the mortgage if your parents will be living in one of the units. You may be able to find a good deal though if you search hard.

You can start getting prequalified with a lender once you know the amount you will have available for a down payment.

Good luck!! PM me if you have any specific questions :)

lots of good info on here. The value it's in the buy. You've gotta find that deal. Tons of mismanaged units, some in less desirable areas.  You've gotta get your ducks in a row so that when you've found the right place you can grab it. The public sights are good for figuring out rents in an area. I'd start looking in outlying areas.

@John Son

I think you're asking the right questions here.  Family situations can always be a bit tricky.  I DO think it's a good idea to invest and work with family members as long as they can be trusted and you have an honest relationship with one another.  Layout all of the expectations up front.  Obviously, this being your parents, I'd say go for it.  Of course, you need to do your due diligence.  Being new, I would just start picking up the phone and calling agents about multi-family properties in the area you're looking for.  Also, I wouldn't worry too much about what the current rent-roll is at an apartment (while it is great info to have) but start to learn about the area as a whole.  Learn about what the market rent rates are (because these could be higher or lower than what the current rent-roll is), what the schools are like, if the population is on the rise or is decreasing, crime statistics, etc.  This truly is a situation where you're going to "need to manage like your parents live there".  Good luck and feel free to contact me with any questions!

@Kiersten Vance ,

Thanks for your suggestion on using Redfin. I did see a more thorough breakdown of income and expenses to analyze the deals in more detail. Have you found that the numbers listed are pretty accurate, or could I still request source documents to verify historical information myself? Is that in any way intrusive or considered bad form?

Based on what my parents are saying and a little research on the side, it's looking a lot like we're going to end up making a 20% down payment even if my parents occupy a unit, so the additional equity in the property should make the search slightly easier, even if OC seems a little pricy.

I'll find out when the house is listed and work on prequalifying / getting preapproved then.

@Vincent Guerrero , what are typical signs of "mismanaged" units? Do you have any search tips or physical appearance giveaways to look out for? I'm willing to make a weekend drive down a few neighborhoods, but I'd like to have an idea of what to note.

@James Triano , I think the family dynamic between me and my parents is a little tricky, but I want to believe most of our differences are unrelated to real estate and have no material effects on doing business together. If my parents were to live in a unit for free or for discounted rent, would you recommend some sort of payment / investment structure to make the situation a win-win? They're offering to pay rent, but they're also making the whole down payment. Do I charge them regular rent and cut them a part of the cash flow for their investment, or can their rent be heavily discounted at a fixed rate to keep things consistent? I know my dad can offer a lot of sweat-equity, but as far as property management goes (finding tenants, screening, basically any communication that prefers English as a native language), I will be in charge of.

I will try to "cold-call" a few agents listing properties I'm interested in shortly. Where have you found is a reliable source for current market conditions?

Also for everyone who's replied so far, feel free to PM me directly as well (: I'm not 100% keen on all the forum post rules just yet.

@John Son Have you considered investing in an out of state deal where you could pick up 2-10 properties on what it would cost you for one in California? If you ever want to toss that idea around and get more information, id love to connect with you. You can find me here and also on Facebook.

Best of luck to you in your adventures

@John Son Welcome! Are you sure your parents want to live i an 4 plex? That is the question I would ask 100,000 times.

@Rebecca Cirisan , I've given it some thought, but I figured I should get a grasp on how things work up close before doing deals out of state, since I've only rented my whole life and my parents currently need a place to live. I'll be sure to reach out to you when that becomes a good option.

@Dylan Vargas , are there any hidden downsides to living in a 4-plex, as opposed to a 1-unit home? The only reason we considered it is because I'd like to invest in rental properties while providing my parents a place to live.

@John Son ...depending on their age and lifestyle I would just make sure my parents would want to live in an apartment complex. Some people may want to and others definitely not. Know what I mean? There is no way my wife Joanne would live in an apartment complex unless we did not have an alternative. Not in a snooty way but in a privacy way. If we were broke and thats all we could afford she would have no problem living in an apartment. Make sense?

@Dylan Vargas , that makes sense, I can understand that. Thanks for your input!

hello, and great question! One thing you have to consider is who is your target market? Who is your customer? I currently reside in Orange and invest out of state, in fact, all my portfolio is out of state in multi family. You just can't get the same returns on a buy and hold in california. Not yet at least. I would be happy to share how out of state is profitable for my self and my investors. 

Hi @John Son . I have found the numbers to be fairly accurate, but I always run them through my own excel spreadsheet just to be sure they included everything. For the smaller 4plexs and under, owners don't always have a quickbooks (or similar) income and expense report for you to look over. So even if you ask, they may not have anything. I always ask for commercial income/expense reports to look over, so no I don't consider it bad form at all. You are buying the property as an investment so it has to make financial sense :) 

Craigslist or apartments for rent is a good place too look for similar rentals in the area to compare rents that they are getting. I would be happy to run the numbers with you on a couple and show you how I do it if you would like! Best of luck!!

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