Private loan situation potential to buy & hold

1 Reply

Hey all,

Just wanted to get some feedback on a possibility with a current situation I'm in with the condo I'm living in and the arrangement I have with my parents.

I currently co-own with my parents (tenants in common) in a 25/75 split, respectively. This is a condo in Southern California and the number we're working with is $523,000, which is what was paid back in 2007. We've taken a loan on the 25% ownership from them as well, and have about $89600 paid off at this point so $26150 owed.

I have two brothers, and in my parent's trust/inheritance, they have split things three ways. So for the condo, this means each of us has a $130750 stake in the place. 

My parents are encouraging us to buy them and my brothers out so that we have equity in the place. What we've agreed to so far is that they will 'gift' us [early] our inheritance portion of $130750 and carry back the remaining $261500 as a private loan that we'd be paying back to the trust (and therefore slowly be buying my brothers out per their respective parts inheritance). What this means is that they're saying "you guys just pay the $261500 as if you're buying out that portion and assume that the $130750k is already yours." As far as the $26150 of existing loan we owe, we can either pay that off going into this or roll it over into this new private loan. 

I'm not sure yet what the terms of the loan will be (e.g. 30yr fixed or whatever) so I guess the answer I'm looking for will depend on that a bit but I wanted to get some feedback as far the idea of holding the property and renting it out. 

Obviously we'd need to find another living arrangement (I have considered out of state but this is very early still), but if we did that would it be viable to rent the condo out for cashflow? 

I ran some numbers and based on a 30yr fixed loan with low to no interest (because I think this might be the arrangement my parents would be open to), it appears this could potentially cashflow at least close to around $500 per month based on loan payments, property taxes, and other expenses like HOA dues, garbage, repairs, etc. I'm basing this on the assumption of a $523k purchase price with 50% "down" (per paying off the existing loan and then receiving the 'gifted early inheritance'). Rents in my neighborhood seem to go anywhere from $2600-2900 (this is a 3 bed/2bath condo).

The big drawbacks I can think of are interior maintenance issues, especially with plumbing, which are generally homeowner responsibility. We recently had water damage from the upstairs unit neighbor's leaking fridge supply line and it's just been a huge mess dealing with it. There are fire sprinkler heads throughout our unit and I've had one or two leak before. Leaking fixtures, toilets, water heater, etc are probably what concern me the most with this and all the potential overhead. Of course, the other issue is with tenants and especially the foot traffic/noise from the upstairs tenants (currently the upstairs neighbors are in escrow and the new potential neighbors seem nice but they might be 'loud' on their feet). If we end up renting this place out to people who want peace and quiet, that might not work out so well. I'm sure all this comes with the territory but it seems buy and hold for a condo (and especially if you're below or above someone and have no control over them), in general, is probably one of the more least desirable buy and hold options out there.

Since we bought before the bubble burst, we haven't really significantly recovered in terms of appreciation. It seems condos in my area aren't as high in demand as SFRs (this is in Irvine, CA btw where SFRs are all the rage)

Any thoughts on all this? I may have missed some key details so let me know if more info is needed. 

One more thought that came to mind is if my brothers will want a piece of that cashflow OR if we would have to factor in higher interest because we're technically borrowing from their inheritances. Of course, my parents are the ones who ultimately determine all that but I would think they might want to be fair about it all. I think we'll have to discuss that part more in terms of "what's fair" and what that might practically look like in terms of interest or splitting cashflow. 

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