Inherited Commercial property need help financing life change

Private Lending & Conventional Mortgage Advice
14yFollow

Inherited Commercial property need help financing life change

George Jeffors
Scottsdale, AZ · Member since 2012 · 2 posts · 0 votes

I just inherited and took title to a 2 million dollar 7 unit apartment building in Beverly Hills. I had been managing it from Nevada for several years prior to my mom passing and last year we put a100K into it in roof, windows and remodel. Rents are below market by 20% and rent control limits the ability to catch up immediately - so building may still have upside, it is an easy to sell A property in an A neighborhood, very hard to replace. Also have grandfathered tax savings of roughly 7500 per year,-buiding is 3.5% market cap, I live in Nevada and do the property management myself and use a local handyman. I am getting lots of advice to sell building and invest in higher market cap, have thought about buying a business just can't seem to find the passion, and lot's of people tell me to keep it.

The scenario I need help with is as follows.

My goal is quit my job in Nevada were I earn 50K working 3 days per week ( My Boss will work with me if I attempt to qualify for a loan in CA before I completely quit) I found my dream home to purchase, a 800K home in Encinitas California with an Ocean View. I would like to become a Realtor, sort of working retired.... My income is as follows
50K salary in NV
25K Spousal Support for another 18 months
75K Net income from Building in BH

My current home was under water, but recently it recovered enough so I can sell and come away with about 25K - my current mortgage is 425K and my divorce agreement dictates I sell or purchase in my own name within 12 months as my ex is still on the loan. I just can't figure out how to make this happen.... I will have about 100K in cash on hand, and 300K in my 401K.

How do I finance this change of life, do I rent for a while and wait until I have a Real Estate income to borrow against, do I sell the building and buy the house and a 1.2m rental property close to san diego. (maybe weekly beach condos ?)

Should I attempt to get some conventional financing in CA claiming I work 3 days in NV, should I buy something else in NV before I move as another door in my inventory? I am scared at the concept of borrowing 1m against the building with a 10 year term before variable 20 years.

Can I borrow 400K against building and qualify for a residential mortgage for the other 300K with 100 K down.

All ideas are appreciated

0Reply
23 views

Most Popular Reply

Aaron Mazzrillo
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
14y

Sounds like you have been given an amazing gift and are ready to piss it away on lifestyle. Do not put your new asset at risk. With all that is going on in the economy, haven't you figured out that banks are not your friend? Use the income to rent a place in Encinitas. You can always live above your lifestyle renting than you can buying. And, on $75,000 a year rental income, you won't have much left over after paying property taxes and insurance on that 800K home. You might even find you don't like living at the beach. It is cold and cloudy 8 months of the year. Rent for a while and try it on before making such a foolish.. I mean big decision.

5Reply
See this reply in the discussion

11 Replies

Jump to latestLatest
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Hi George,

    The areas you are talking are mostly driven by appreciation and speculation that values will keep rising.

    That is a very low cap of 3.5%.

    I do work with many investors from California,New York etc. wanting to get a higher return than what they can get locally.

    I have owned businesses before so it is critical when buying a business that you have a proven business model in place with management so that you do not have to be there every single day.

    If you set up a business as an absentee owner with moderate supervision then you can count that as an investment and not a job.

    I don't know that you put 800,000 into your dream home.Having the money work for you instead of dead equity especially being able to lock in low interest rates today I would invest as much as I could.

    Get a loan for that house and put minimum down possible to preserve cash.The Ocean house is nice and I am sure it will appreciate over time but will be dead equity until you refi out or sell.Even on refi they will not let you go to 100% so any appreciation likely you will not be able to refinance because of LTV ratios in the near term.

    I don't know that you want to be a real estate agent in the typical sense.You would have to define residential versus commercial etc.

    I would put most of your money to work as I don't think your cap is going to get any lower for resale plus you can invest in markets without rent control where you reap more benefits.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Luis Castillo
    Real Estate Investor · Whittier, CA · Member since 2012 · 92 posts · 19 votes
    14y

    Consider doing a master lease on the Beverly Hills property. A 3.5 cap rate won't get alot of people interested but a master lease to an experienced investor may work for both of you.

    I also would look for a lease with option on the house you're looking for. You can keep most of your cash and you're payment will probably be lower than if you purchased.

    That leaves your 100k and your 401k to invest as you decide.

    0Reply
  • Aaron Mazzrillo
    Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
    14y

    Sounds like you have been given an amazing gift and are ready to piss it away on lifestyle. Do not put your new asset at risk. With all that is going on in the economy, haven't you figured out that banks are not your friend? Use the income to rent a place in Encinitas. You can always live above your lifestyle renting than you can buying. And, on $75,000 a year rental income, you won't have much left over after paying property taxes and insurance on that 800K home. You might even find you don't like living at the beach. It is cold and cloudy 8 months of the year. Rent for a while and try it on before making such a foolish.. I mean big decision.

    5Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Aaron, you got brass guy, hitting on the poor guy.

    From reading between the lines of the OP, sell it, walk away and start a new life! Any beach with clouds, wind and cold is still better than inland, where it's cloudy, windy and cold, IMO.

    See if you can keep your day job working 3 days a week, a part time Realtor usually works more than that. :)

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Please, folks, no offers to help George do a transaction with this property. This isn't the correct forum for that.

    I believe you are going to struggle to finance a $800K house given your limited income. Even if you can get a cash out refi on the apartment building, you're still going to have to give a personal guarantee on that loan. It may not show up on your credit report, but when you do the loan app for the residential loan, you will need to disclose it.

    The loan on the apartment is not going to be a 3% 30 year fixed loan like you might get on a residence. Its going to be a higher rate and a shorter term. It will likely either be adjustable or have a fairly short balloon. Or both. At a guess, you're looking at roughly $4500 a month in payments on the two. You realistically need north of $160K a year total, verifiable income. With the job in NV (that you're going to quit), and if the income number on the property can be verified by multiple years of actual tax returns, you're close. But you're not there.

    I think you desired residence (which I don't consider an investment, just another expensive doodad like a car or a boat) is out of synch with your income.

    If you really want to go down this road, sell the apartment building. If you can really get $1.2 for it, perhaps 1.08 million after transaction costs, then you can just buy this dream house for cash. You'll have enough cash left to support it and yourself for a few years. Hopefully you will use that to create some sort of income stream that will support you when the money runs out.

    Personally, if I had ONLY, and I do mean ONLY, $1.2 million in assets and cash and I wanted to work minimally I would NOT be looking at $800K houses. That would be putting much too much of my very limited assets into a very expensive doodad.

    3Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    George, you might want to study the lives of people who win lotteries or even get these house makeovers that you see on TV. They have unrealistic ideas about their money and many times end up unable to pay the expenses on F&C properties after going through their cash.

    Have you heard the term "middle class millionaire"? You really are not that rich.

    Why don't you find 3 other partners and lease a giant house somewhere and consider getting an option on it. If your share is 200k in RE expense that would be a good move in wealth preservation.

    Spousal support? Now you're talking. A woman with money (with a good financial head on her shoulders) could be a very good investment. Having someone with some sense telling you what to do would be a good plan.

    Good luck.

    0Reply
  • George Jeffors
    OP
    Scottsdale, AZ · Member since 2012 · 2 posts · 0 votes
    14y

    I really, really appreciate all the help and comments. I researched a master lease and for the life of me I don't know why I would want to use that as the seller, the building is easily marketable, no other properties on market currently? Am I missing something - is it to leverage the tax grandfathered advantage ?

    The building in BH been appraised at 2m and my mom was really old and let the property get old and tired and did not keep the rents up. I have raised them the max and started fixing up the place and raising the rents the max 10% allowed. Still 15% under market in current condition, and 30% if I renovate the indiv apartments.

    I was the executor of my moms estate and maybe I was too cute by half. My sister gets the 700K house and the 1.2 mill fourplex in a California Beach Community. I went for BH apartment because of the upside.

    OK - so I work in title and HOA field, I am 56 years old college grad and I just want to end up in the same position as my sister (owning a nice home and having the income from a paid off 1.2 million fourplex would put me on equal footing and match my own life change objectives.

    My personal situation is complicated. Since my divorce a few years ago I have settled into a long term relationship, having lived together for a couple of years, and I am proceeding as if we are married. She is also recently divorced, she earned a million dollars a year Realtor before the crash in Nevada, her divorce, ex... and the Real Estate bust left her with IRS debt and destroyed credit and she has financial obligations to college kids in the short term (PS - we met and moved in together before I inherited the money and while she was not working dealing with a medical scare- so no gold digging here.)

    However- we are sensitive to appearances and she insists anything I buy be in my own name and that if anything happened to her I could afford it on my own. I prefer to move to Calif and start over, get out of town, leave the misery behind etc. We are both 6 years away from early Social Security - and my kids are out of college and doing well. Plus my ex is a physician and will look after them as well.

    My gal says I should take a million dollar life insurance policy to protect my kids since all my 2m in assets (not incl 400K - 100 k cash and 300K 401) are in one basket). Not by design, however we have three dogs in our new family- so renting may be problematic, as well as her credit score. She used to be a SVP of sales for a fortune 100 company and is a go getter - so I think we will do okay selling residential real estate in San diego. She left the business for a few years due to a health scare which has since passed and says it does not make sense to start back in RE in Nevada and then move in 4 months - so she is out of sorts waiting to get started, while I sort this out. I think she is too embarrassed by the fallout of her messy ugly divorce to stay in town and be happy. She wants to get started but after losing her last relationship to divorce she refuses to go out to California and get started without me ...

    Her initial advice was to not borrow or sell building (I think because it creates a bad appearance to family and friends). She said let's move into one of the apartments for a year, fix up the place and get it ready for sale while getting our RE career going out there. Moving out of 3000 square feet with three dogs into a one bedroom seems crazy even though I fixed up a unit to be an owners suite this month and heck it is Beverly Hills. The traffic is miserable though and the density is crazy.

    She said if I want to borrow against the building I should by a business like a laundry mat - and hire a manager and make a 10% return instead of 20% - or a bed and breakfast, or weekly beach rentals and she will rent them out for me and we could live in one, at least we would be at the beach....

    I appreciate the comments about being a Beer and Pretzel millionaire - however my story has a little more detail so I wanted to provide this followup. We have both lived materialistic lives chasing the dollar, raised our kids in the best schools and neighborhoods. At 56 years old - I have owned the cars, travelled the world and put my kids in a good position. Now having been wiped out by divorce and Real Estate Crash - I don't feel motivated to be filthy rich anymore. I want to live at the Beach and get up in the morning and work casually at something I love (RE) and be with my significant other. I lived a hard life, played hard and don't want to drop dead at 60 of a heart attack like my DAD!

    So that is my full story, any additional thoughts?

    Thanks

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y

    The $800K dream house is just that, and should remain that until you can create enough income or liquidate enough assets to actually afford it. I'm not sure what kind of life change you are looking for. Living in CA? Quitting your part time job? Running a new business? Regardless, IMO you shouldn't invest in a new personal residence until things are more stable. By stable I mean knowing what your income will be and figuring out where you really want to be. Many people who inherit assets make big purchases and big moves without knowing what they really want.

    If living in CA is the goal and you are not yet certain what you want to do here, why not start out by moving into one of the Beverly Hills units? Rent control allows you to terminate tenancy in order for owners (and family) to live there. If that isn't acceptable, you can find plenty of great rentals and still come out ahead of buying at this time.

    I say move to CA first before buying a house and/or selling the BH units. Figure out if So Cal really works for you.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Hi George,

    I wouldn't spend the money on the things you are looking at doing.

    Is your significant other going to support herself or will she look to you to help her out with things and then money will be depleted??

    She needs to sustain herself and fix her own issues from choices she has made in the past.

    I would work this backwards.Figure out what it would take for you to live comfortably annually.Then use your cash to obtain at least that much cash flow or greater.Right now you are saying that equity is high with cap but cash flow could be better.I personally think a bubble is coming for certain apartment assets.I think you might do better buying a value add apartment with tremendous cash flow upside based on the income approach and sell today if you can get a 3.5% cap.The reason is many of these urban core markets have talks of being overheated and when common sense comes back the bubble will deflate a little increasing caps and then you will wish you would have sold instead of holding.

    This will help live your lifestyle and still have some cash flow left over.

    You could also buy a business to run.Typically owners want a 3 times multiple.

    If it nets after expenses say 100k annually they they want a sales price of 300,000.You the buyer want to try and get at a 2 times multiple of 200,000.In this situation you would put typically 50% down and the seller holds the other 50% note for say 5 years or so.

    You might land a bunch of income to sustain yourself this way without liquidating all your cash.

    Have some in stocks,some in a business,some in real estate to have multiple growing streams of income.

    I would also not invest to heavily in moving somewhere as mentioned where you do not know how you will like it or not.Often when someone dies and an inheritance happens people are often more emotional than even they recognize for awhile.

    This is why most say give yourself time to grieve before making big changes in your life personally or financially.Then if you still feel the same way pursue what you were thinking of.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    0Reply
  • Luis Castillo
    Real Estate Investor · Whittier, CA · Member since 2012 · 92 posts · 19 votes
    14y

    I mentioned the master lease because it sounded like you didn't want anything to do with owning the BH property. Most people look it master leases as benefits to the buyer, but you can negotiate it to benefit you. If you have a guaranteed income from the lessor you can borrow on the property up front, plus you can ask for a large deposit from the lessor. Since you are offering good terms to the lessor you might achieve a higher price when you sell it to him. A property that needs work in a rent control area, in a soft market isn't going to bring top dollar now.

    You have to make sure he has the funds to fix the property and even make that part of your agreement.

    I have to agree with Aaron, It seems that if you get all the money upfront, in a short time it's going to be gone. At least with the master lease you can get what you need now and still have plenty for later.

    Having said all that, I do think that in your best interest you shouldn't be in a hurry to do anything. You seem to have to much on your plate that isn't settled and time can't hurt you. As far as the dogs and leasing is concerned, that's what pet deposits are for. If you look I am sure you can find the perfect house to rent/lease or lease with option to buy. We are in the perfect market for that.

    Good Luck. Remember you aren't under time constraints to sell or buy. Use time to your benefit.

    0Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    14y

    There is a lot to be said for living below your means. You can still be happy without an 800K house.

    Rent, settle in, keep your BH property, keep your bills low and take it one step at a time.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free