Hoping this is the correct place to post this, forgive me if it isn't. I'm looking for input or advice on the following situation.
My Father is getting older and it is becoming much more difficult for him to manage the 4 SFR's he currently rents. I have helped him over the years with the hammer and nail stuff and occasionally with collecting rent and dealing with problem tenants. Not until now have I ever had a close look at the financial end of his real estate investments. This past year he has not seen one DIME in rents for two units. He has been over extended and is currently facing the potential of losing his primary residence if he is not approved for any of the government programs associated to helping homeowners who are underwater. To top off the fact that he's underwater on his primary residence he is paying a 7% rate. DITTO FOR THE UNITS HE HAS NOT RECEIVED ANY RENTS ON. I am now his full on property manager (yay me!). I don't mind, he's my Pops and he depends on his units for living expenses (he owns two other SFR's free and clear). Pops is an immigrant and has worked hard to get where he is, not to mention finding time to raise a kick *** son. I am also using these experiences to bolster my REI street cred.
I have secured a tenant for unit#1 after having to evict the prior tenant I have just evicted (received judgement yesterday) problem tenant #2 and should have it rented rather quickly based on the interest gained on unit #1, they're right next door. I will also be in need of a third tenant for one of the free and clear properties. Pops doesn't follow any of the BP rules for landlords. NONE, doesn't know what NOI is and operates strictly from a GROSS RENTS perspective. So he's eating every bit of cash flow he has available when receiving 100% of rents.
What I'm trying to do is teach him some of things I have learned here and elsewhere to help him become a more financially savvy landlord. My preference would be that he let me manage them in they're entirety and he can sit at home and collect checks. Well, not really he still works six days a week at 70 yrs old. "What am I going to do, sit at home and watch novelas (soap operas)?"
Along with teaching him to be more financially savvy, I'm trying to figure out a way for me to get him out from UNDER Units 1 and 2 and into a more manageable rate. The combined mortgages total owed is $140k which is about 40K above the current values. His combined rents for these two are $1445, the mortgage is $1200. He can not refi due to his credit being banged up pretty good. I'd like to purchase these from him and I think he could possibly gain MORE cash flow if we were partners in these properties vs. continuing to have the debt costs eat at all of his potential cash flow. I'm working the numbers right now and I wouldn't have a problem with overpaying for the properties right now and would almost look at it as a gift or payback to Pops. I'm trying to work the numbers right now to build a business case to present to him.
I'd like to purchase the property and put it in an LLC with 75/25 ownership in my favor, it would be my very first investment property. Not the sexy $50k wholesale commission or 200K net profit flip but hey, its about solving problems and potential long term win for me right?
I humbly request any input and further ideas from BP on what other actions I could take. To add one more detail, if it came down to it he would give up his primary residence before giving up his investment properties. Looking for problem solvers!
Does he want to continue to own these or is there a way to sell them off and still come out ahead? You mentioned he was underwater on his primary residence; I don't see why he would want to continue to own the rentals and lose his own home?
Have you looked into mortgage modification for any of the underwater properties? Just did a quick Google search and it looks like an option for investment properties also.
@Dawn A. - There really isn't a way for him to sell them off and come out ahead. He has two other properties he could move into and still keep control of the other units, I know it's backwards and illogical WELCOME TO MY WORLD! He rationalizes that his current home is too big and needs to downsize anyway. He's currently trying to qualify for a program to reduce the principal balance owned.
@Michael Hartman - I've searched and all the programs I found were strictly for owner occupied. I don't think there is anything out there for investment properties.
Thanks Michael, I think I was looking at HARP and HARP2, wasn't aware that HAMP could be applied to investment properties. I'll definitely look into this specifically.
Hey @Timothy Cervantes - sounds like a sticky situation, good on ya for helping your pop. I'm close with my parents also so I can relate to your eagerness to figure something out. I'm not clear on your LLC plan but if a new loan is involved your loan will be based on the appraised value not the price you are buying them for. Meaning you'll have to pay the difference (the 40k you estimate they're underwater) between appraisal and purchase out of your own pocket.
While I like your noble gesture of taking one for your dad, you might not be doing the best thing for him. Consider this, you most likely will be setting your own financial progress back 10+ years taking on over leveraged property. I'm guessing your dad would rather take the hit to his credit/finances in his twilight years instead of crippling his son's best working years and financial potential. I don't know your situation, but two over leveraged properties on your balance sheet will most likely be a major road block in your future RE endeavors.
You might better serve him by purchasing your own investments that you can use cashflow from to support him while helping him get these investments in line until you can dump them. In the meantime, you should get all the financials, minimize as much expense as possible and boost income as much as possible.
Are the rents inline with market or can they be raised? Shop the insurance policy around and see if you can get a better rate. Could you put 2k into each unit and charge a bit more for rent over time? Can the property taxes be contested? Do you have a large friend that looks like 'The Rock' to collect rent for you? Every penny you can gain pulls you that much more out of the nosedive.
Not really a solution to your situation but I wanted to share my thoughts on what I'd be thinking if I were in your shoes.
Best of luck!
@Michael Hartman - Unfortunately HAMP applies to government backed loans. These units were purchased via conventional financing.
"If your mortgage is owned, insured, or guaranteed by Fannie Mae, Freddie Mac,Federal Housing Administration (FHA), Veterans Affairs, or U.S. Department of Agriculture (USDA), ask your mortgage company which solutions will work best for you."
Have you considered short-selling the underwater properties?
I'll ask among my network if anyone has a connection in the Fresno area. Maybe someone will have an idea that will help you.
No good deed goes unpunished.
@Michael Olesky - Appreciate the thoughts here. Rents are just about at market rates (slightly less) but I love the idea of a little lipstick and curb appeal to possibly maximize them a little more. This gave me some great ideas. I'm thinking rents could be raised slightly higher with one since the first unit is now secured. I've been so focused on the problem I've been blind to some of the obvious Landlord/Buy&Hold basics. THANKS!
I am definitely thinking about my future as well, that is the crux of it. There is risk here but I do believe there is long term upside for me even though the short term would not be as sexy. The purpose of the LLC would be to still give my Pops minority ownership without full control and make him feel good about still being in "business" with the property. Right now he is negatively cash flowing so the prospects of him still having a stake AND positively cash flowing should be attractive. I would also keep the percentages of the cashflow slightly in my favor and if things turn around via appreciation or equity he has the option to buy me out.
@David Dachtera - Yes his primary residence is on the table for a short sale should he be denied for the principal reduction he has applied for. I appreciate any contacts you could share with me that are in my area should we come to that point.
For other readers of this post, I appreciate any further innovative/creative ideas you may to share. With the hundreds of thousands of problems solvers on BP I'm sure we can come up with a solution!
@Timothy Cervantes Has he tried the "Keep your home California" program on his primary? It looks like they have a mortgage reinstatement program as well as one for mortgage reduction. I guess it can be up to $100k principle reduction, if qualified, and the lender cooperates.
@Mark Freeman - Yes, that is one of the two programs he applied for. We're hopeful this his ticket and his couselor at the Community Housing Council stated it looks solid. We should know within the next 30 days. The application was submitted this past Friday.
I'd find a way to get out from under his primary residence and let him move into one of his rentals. The problem is that if he gets his primary repo'd they might come after him for the money because he has rentals. I'm not sure your father is going to go for you owning 75% of his properties. If he rented his primary house would it cash flow until the values come up again. Have you gotten a realtor involved to find out exactly how much everything is worth?
@Brian Mathews - The suggestion of moving into one of the rentals is definitely an option. But only if all other means have been exhausted to get him out from that mortgage (83k upside down). We need to let the modification apps run their course and we can decide on his primary at that point. Renting it now he'd still be negatively cash flowing that one. We do not have a realtor involved but the office he is working with for the modifications did a comp review of his primary. I'm fairly confident on the current self assessed value of the rental units based on the research I've done.
you may want to check out this program: http://www.b2rfinance.com/programs/entrepenuerial-...
I don't know a lot about it but it looks like they could wrap all your properties into one loan. And since Two of them are paid for, the equity in those homes may allow them to all be refined together.
@Jeff Zimmerman - Thank you for the link! I'd not seen this before so I'm going to dive into it. Gotta LOVE BP!!
awesome! Glad I could help
1. Follow through with your modification avenues.
2. It's a family property, you don't need an LLC.
3. He can convey any interest, in whole or in part, as his estate planning program and avoid the due on sale issues.
4. After you are in title, you can manage, regardless of your interest in title.
5. He needs a Will to better pass remaining title.
6. You can workout any note you like with him, it becomes an asset and the disposition of property and the note can be addressed in a Will.
Caution, your note might be secured by your partial interest or not at all. This effects marketability of that note. If he were to apply for medical benefits for care, his assets will be assessed and proceeds will be required to go toward his care before he can qualify. Notes as an asset are usually by law, assets being at market value, so the value of that note can be zip or very much less than the amount owing.
You will end up on the inheritance end anyway, you didn't mention siblings or other heirs, you may need to address that side.
I wouldn't take 2 rentals and a primary home into a closely held corporate structure unless there was a good business or estate planning reason to do so, you probably don't need the additional brain damage. Get all insured, perform good management and let it ride.
Now, your future investments you may want an LLC, cross that bridge when you get there. Good lick :)
It appears as if your father isn't making wise decisions the older he gets. If you bundle them all together and he continues on this path. I will assume you will run the risk of losing the 2 that are paid for. It would sure be a shame to lose those. I'd probably go find a good estate planning attorney and get your father signed up for long term care insurance. If he gets to the point he needs substantial medical care and needs to have the gov't pay for him in a nursing home. You will have to sell those assets before Medicaid kicks in. There is a lot at play here aside from just those rentals and his home.
@Bill Gulley - Estate planning is definitely on our minds and we'll be crossing that bridge just as soon as we are clear of this little hurdle.
Originally posted by @Timothy Cervantes :
@Bill G. - Thanks for the input, this is what makes BP great. Your suggestions are simple and to the point! Thank you!
@Brian Mathews - Estate planning is definitely on our minds and we'll be crossing that bridge just as soon as we are clear of this little hurdle.
Your estate planning should have already been addressed. If you know the date when someone gets hit by a bus, I can make you a very, very rich man! LOL :)
@Timothy Cervantes Even though your dad bought the homes with conventional financing, almost all loans are sold to Fannie Mae or Freddie Mac.
I would think that estate planning would be a very important part of this hurdle. You run the possibility of losing the homes should your father become incapacitated and require substantial medical care and he doesn't have the means to take care of them. It would be a very sad thing for all the hard work he has put in to all be in vain due to improper planning. It might be worth your while to sit down with an attorney specializing estate planning to at least point you down the right path or give you your options.
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