What I need help with is a advice/suggestions on what you think I/my family should do with the properties we own. During the recession, my brother was able to purchase 3 properties in California. However, shortly after he was involved in a motorcycle accident and now has severe brain damage. Thus, he can no longer manage the properties and is simply living off of the rent/SSI with no money saved for future renovations. He currently rents them out for below market value to friends/family to guarantee himself a check with the expectation that they wont ask for anything. This can only go on for so long. So here is his situation.
1st house: Financed for $80k, owes around $65k (my guess, based on 7 years of paying mortgage). House is now Zestimated at $258k. 3 beds, 1.5 baths. Rent zestimate around $1550, but it needs some updating to get to that point. This is the one he lives in, by himself as his wife left him after the accident.
2nd house: Paid cash. 2 bed, 1 bath. Zestimate is $202k but has a medical lien on it for the amount of $73k. Currently rents it for $850 but the zestimate is $1350. Needs serious updating and possibly some foundation work.
3rd house: Paid cash. 2 bed, 1 bath, in the process of converting garage into 3rd bedroom. Zestimate is $210k, with a rent zestimate of $1350. After his accident, his wife convinced him of putting the house in her name and then left him. She now occupies this house. However, if I can prove to her that the value can be invested in a different market and more money can be made, I believe she would sale.
So, here I am trying to help out, as he is unable to help himself. What would you do in this situation? The zestimate indicates $460k in value minus the $138k he owes on the lien and mortgage for the first 2 houses. So $322k, in a very generous estimation. The 3rd house he is trying to fight for, but doubt he can do anything about. That would add an estimated $210k, so possibly around $500k all together.
I was thinking of helping him invest in an out of state market such as Cleveland or Indianapolis, get a few turn-key properties, hire a PM, and live off the rent. Should he sale his properties? Get a HELOC on his 1st house and invest it in a different market? I have about $10k saved that I could help him with, but dont know the most efficient way of spending that money. Should he just keep the properties, hope the value continues to appreciate and do the small repairs that family friends/contractors can help him with?
Obviously by reading this, most of you can probably figure out that I have no idea what the hell im getting into. I am currently in the process of learning, but have my own career to focus on. Any advice/suggestions would be much appreciated.
I am sorry to hear about your situation. Here are some things to consider. Since your brother is not working he likely would not be able to qualify for a HELOC or conventional financing on any new properties purchased. I would think that the returns and effort would be better if you sold the properties and invested elsewhere. If you do decide to sell the houses make sure you use a 1031 exchange to avoid the capitals gains tax.
Do nothing ABSOLUTLY do not sell and buy half way across the country chasing a few % larger returns.. the risk for someone like this with no other income is far to great.
keep what he has and work on boosting the rent.. do not sell .. try to agressivly negotiate the med lien.. many times they will take 10% on the dollar .. especially with someone who cant work.
@Jeremiah Coleman Tough situation :( I have lots of questions though:
How much is he actually getting in rent in total? Just $850 from House #2?
How much would House #1 rent for as-is if he were to move and rent that one out?
What's the relationship like with his (ex-)wife? Putting the house in her name after his accident with a severe brain injury... I feel like he might have some recourse there but a) maybe not, and b) you know their relationship better than we do, maybe it's easier to work with her than against her?
Is your brother able to manage these properties and make decisions about them, or does someone else have power of attorney for him?
As for personal budget, how much does he get monthly from the rents, SSI, and combined total? How much does he need per month in order to cover his monthly expenses?
Do you know how much his mortgage is on house #1 per month?
If you had to estimate reno/repair costs to get these houses looking decent, how much would you say for each?
@Jeremiah Coleman Have you done on the math on what the actual take home is after taxes, agent fees, ect? It probably wouldn't be worth selling at the point.
Check with local banks and see if they would leverage the equity on one of the properties for the rehab funds to get them all fixed up. Then give them over to a highly reputable property manager and let it coast.
I am with @Jay Hinrichs , do not sell. You should raise rents if you want to help him out, this way he gets the appropriate income that he should.
Thanks for your reply! I had no idea how HELOCs work, just read about them a little here. On investing elsewhere, that's what Ive been thinking as well, but have no idea about investing in out of state markets and how reliable PMs are. A lot of risk. But a very uneducated thought process was to sell house #1 and move into house #2. Use the money to invest in 2-3 $$60k-70k turn-key properties in Ohio. Use the left over money to do some cosmetics on house #2.
Thanks for your time.
Thanks for taking the time to reply. Gives me a lot to consider. Ive been considering helping him update the houses, but it is hard when I've already been paying his property taxes which has added up to a few thousand dollars. The taxes on property #2 are extremely high, not sure if that is due to the medical lien. Something has to change though, he has a monthly income of around $1800 with a $800 mortgage on house #1. $1000 a month to cover all other expenses is not enough for someone to properly live, especially someone that was doing well before and feels like everyone is screwing him over now. Brain Trauma is not fun to deal with, I can tell you that much. I really do appreciate you guys. Thanks
You might talk to a financial and tax pro here, but I wonder what
@Jay Hinrichs thinks about paying off one of the rentals by selling one of the others? Given your brother's situation it might be nice to reduce the headache of managing additional properties. By paying off one or more of the properties, using the profits from selling one you would free up more cash flow. This is the wrong strategy if you are trying to leverage a real estate business into growing a a business. But in this case, if it were me, I'd be trying to reduce the headache and management, reduce the debt on the assets to maximize free monthly cash flow.
I am not a tax pro, but since he lives in one, and it sounds like for more than a couple years, I'd likely sell the one he is living in since he won't have to pay capital gains on it, and move into one of his other homes, use the profits from the sale of the previous home he was in to payoff one of the other assets.
Not only would this reduce the headaches of property management but it would reduce his debt and increase his monthly cash flow.
Just an idea...
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