Should I buy my parent's house or a duplex?

20 Replies

Recently I set a goal to buy a duplex and try house hacking with an FHA loan. My current situation is that I am renting a house from my parents. They asked me if I wanted to buy that instead, either purchase would be my first property purchase. My parent's house does need work and I think I could probably flip it in a year or so with the FHA. But I have a few questions.

Should I buy it or continue onto my duplex plan?

If I buy my parents house what kind of deal could I try to get without taking too much advantage of them? 

Has any one had experience buying from parents that went well for both parties?

How can I make my parents house work more as a flip without incurring too much gift tax or other such tax burdens?

What might be the pros and cons of abandoning my duplex plan to doing this instead?

Any advice would be much appreciated.

Thanks!

it is 1500sqft on a 6200 sqft lot. That's not a bad idea but I would have to see what the city laws are on that as I think they might be strict where that is concerned. I will look into it though. Thanks for the response!

@Monica McDowell what do to stand to gain flipping you parents house? What do you stand to gain buying duplex? Personally I would be more open to cutting a deal with your parents. You know the property already, you can avoid competition from other buyers, and potential profit may be a nice down payment for future MFR.

Plus you can do seller finance and if you just give the 12-20k equity I don’t think they would have a problem with that. This way you get the loan you need for a lower mortgage probably then what they pay and you can refinance later to buy solar panels to save money and gain money from the city depending on how many you buy so you can sell to the city.

@Shawn M. I suppose with the duplex I was going to live in the smaller unit and rent out the main unit. I have no kids and have no problem downgrading my accommodations to start out on my REI journey. I wasn't sure if there would be more upside with a duplex or with getting a great deal from my parents. I do like both routes but am trying to gauge which would have better ROI. But as @Giovanni Luna   suggested maybe I'll just build another unit on the property if I can. LOL

@Monica McDowell it really depends on your market, the duplex deal itself, and your parents property. Tough to say since scenario is vague. I personally prefer duplex investing, I currently owner occupy one. But if my parents turned to me and wanted to sell their house to me at a discounted price I would flip and use profits to purchase another MFR.

@Chingju Hu The zillow estimate for my parents house is $550k. If I use FHA the loan will be about 530k assuming I just buy at market price. With a duplex I could probably get a similar price in a nearby area. It is in Los Angeles County. These numbers are just basic. I just started out on this journey so not sure how to compare properties and figure out the correct numbers. I am estimating property taxes at around $4000 based on county assessors website.

As you are starting out on REI journey, consider if you could house hack this current property by taking on roommate(s).

Would parents seller finance or sell subject to?

Why are your parents offering to sell to you? Do they want to get out from under the rental property or are they trying to help you get started? ie Would they sell at low end of FMV range to give you instant equity?

And get from your parents all of the operating cost info you need - plus some.  No guessing needed if they know.

Good luck.

@Monica McDowell what do you feel the after repair value of property is? Perhaps speak with local agent, get an idea of current value and what they think value can be once property is fixed up. A market like LA I would assume has a lot of competition similar to my market. Right now one of the biggest struggles for finding a deal is beating the competition of multiple bidders. If you are concerned you are cheating your parents perhaps sharing a percentage of potential profits is the solution, create a win win scenario.

@Monica McDowell @Karen O. somewhat touched on this - Do your parents need the money today or can they wait a year? Why not partner with your folks without buying from them? Step one: get an accurate value on the house as it is today - that would be your cost base. Step two: figure out which renovations would need to be done and what the cost of these will be. Step three: figure out what the post renovation value is. Then cut a deal - your parents get the original "base" value of the home. You pay for the renovations and get any profits over that base value (or you guys come up with some sort of split where they chip in on the renovation costs and share in the additional profit). But you don't ever buy the house. In the meantime, your credit is free and you can watch for a duplex... 

I think all the other posts have great points. I would just add look into using a land trust to transfer ownership to you. To me the biggest benefit would be you won't get reassessed for property taxes and you get the beneficial interests. I would also agree with another person's suggestion of adding onto the property. You're in LA so there is the big push to have increased housing. Why don't you look at to see about making a 3-unit addition to make your place into a fourplex. That still counts as residential. I also think it's a great idea if you can take your parents loan as a subject-to. You can then look into getting a HELOC to help you with construction costs. Right now even the big banks are offering up HELOCs and you can look into that before the market takes a dip and the banks pull HELOCs off the table. Just some suggestions of what I would be thinking to do. Good luck!

@Karen O. Hi Karen! My parents would not seller finance as they still owe about 200k on the place. They have been wanting me to buy the place for awhile but I haven't been ready till now. Since I just recently got into real estate investing I am now weighing my options out as now I would look at it as an investment instead of just a home for myself. I think they would sell closer to the low end of the FMV range but we have yet to discuss the details.

@Shawn M. The win win scenario is what I am looking for. I want them to get value out of the house while I can still either flip it and make money or move on so they can get top dollar. I have a couple of agent connections so I will reach out to them and see if I can get the ball rolling to gather up the correct information.

@Teri S. That there is solid advice. I never thought of it that way. I will definitely approach them with that idea. It could definitely turn my smaller down payment into more money while getting them the value they want out of the house. Thanks so much for that!

@Jay Dimacali Hi Jay! I will research the land trust but do you have any info on how that process works so I can get a general idea of what that is? Would be great to save on the taxes that's for sure. 

I would love to add on to the property but I was just reading up on the cities residential zoning laws today and that might be a bit difficult. It is in Glendora. They require so much setback on the front side of the property. The property already has a pool in the back with no room on the sides or back to add even a small guest house. The front lawn has so much space though but if I am reading the zoning restrictions correctly there isn't much room for an addition on the front side without violating the zoning laws.

I will do more research on this as well but what does subject to mean?

Thanks for your response!

@Monica McDowell

What about this scenario

You purchase the property from your parents. They use a portion of the proceeds from the sale to partner with you on the duplex that you want to buy. 

That way you have 2 properties.

One thing to point out though - if your parents property is really worth $550,000 it likely won't cash-flow that well. So you prolly will need to go the route of fixing it up and selling it to get additional money.

One thing to consider is that the IRS can be more scrutinized when dealing with sales between family members that are not arms-length transactions. 

@Monica McDowell

Getting a deal on your parent’s house is not something I would do.

-it teaches you nothing in terms of finding deals

-it takes away your self reliance, and your parents may perceive that you owe them for doing you a favor

-It will encourage you to take a lackluster or even bad deal because you think you are helping them out or that it is easier 

-You won’t truly be investing in real estate, just buying a personal residence 

Buy a duplex with an FHA and see if your parents want to owner finance their home to you. Win win situation. Best of Luck.

@Monica McDowell subject-to means getting the property with the current loan in place.  You just take over.  Use the land trust to move the house into the trust first before taking the property subject-to.  It's highly unlikely but the bank might call the loan due if you get the house via a quitclaim or some other way.  In a land trust, you can just tell them the house is in a 'trust.'

I wouldn't recommend buying the house from your parents.  Another loan in your name and the house gets reassessed = higher property taxes.  Ask me how I know.

Getting shut down by the city for adding on another unit isn't great but it's not over yet.  I would look into seeing about having the garage converted into a unit.  Depends on Glendora's rules but in LA I'm sure you've heard about the city being more 'lenient' about granny flats and the like.  It costs money to do it legit but you could be looking at a good $1k a month.  Check out the IKEA in Burbank and they've got a set up for a 400 sq ft apartment that looks great.  It's got everything and the kitchen sink.