All Forum Posts by: Jon Schwartz

Following this! I'd also like to know. 

Gracie,

Excellent problem to have! And an interesting conundrum to ponder.

My first word of advice is to consult a 1031 qualified intermediary -- and perhaps one will chime in on this thread. As a layman with a general understanding, I have three concerns:

Firstly, in a 1031 exchange, the upleg (your and your sister-in-law's houses) must be purchased by the same entity that sold the downleg (the Venice bungalow). If the Venice bungalow is in a trust, the two houses bought with the proceeds will have to be in the trust or, at least, owned by your in-laws. Is that the plan? Just want to clear that up.

Secondly, doing a 1031 exchange doesn't eliminate capital gains taxes, it just defers them. So to avoid the taxes, you and your sister-in-law would have to keep the houses purchased for you until your in-laws pass away and the tax basis adjusts on inheritance. How old are you in-laws? How long do you and your hubby and you sister-in-law intend to live in these homes?

Thirdly, one can't 1031 exchange into a primary residence. I suppose this point is moot if your parents own the house and you're technically renters. I wonder if this is scrutinized. I imagine the IRS won't be too happy if you parents don't report any rental income on these two investment houses.

Perhaps you have these questions answered, but they give me pause in pursuing a 1031.

I'd recommend a cash-out finance with a new, 30-year term (though, depending on your in-law's age, maybe a 15-year term is a better idea). Rate is crazy, crazy low right now. Rates are much lower now than the longterm appreciation rate for property in LA, so it's a better move financially (so long as nobody is strapped for cash in the meantime) to hold onto the properties and pay the interest on the finance.

You might also get recommended a HELOC. I'd say you should refinance over pulling a HELOC because HELOC rates are variable. These low rates won't last forever, so you're better off locking in a longterm, low rate now.

I'm curious, do either you or your sister have plans to househack a multifamily? You could take your in-laws gracious gift and really build on it!

All the best,

Jon

Les,

Oh man, do I have great Santa Rosa memories... Back in the day, I was working on a Robert Redford film in St. Helena and driving over the mountains to Santa Rosa to meet a girl I was seeing. What fun.

I'm going to vote for househacking. I'm househacking a duplex right now. I live in a really expensive neighborhood in LA. Long story short, I pay less than my tenants to live here, and I get all the benefit of the principal paydown every month.

I also believe that wealth creation is the product of equity. I'd much rather own an appreciating asset in coastal CA than a Midwest duplex that throws me $100/month and does little else. Your coastal CA property won't cashflow, but if you househack, you can get in for as little as 3.5% down and/or lower your monthly living expenses from what you're paying on rent.

Househack!

Best,

Jon

Salvatore,

Check out newwestern.com! Very professional wholesaling outfit in Socal. Maybe Norcal, too.

Best,

Jon

Erik, good move pursuing the househack! I househacked a duplex last year with my wife and toddler. I wish I had figured out the value of this years and years ago when I bought my first house.

I'm confident you can find a duplex to suit your needs in southern LA. I'm just south of Hollywood in a neighborhood called Hancock Park. It's an expensive neighborhood that we couldn't afford if we bought a house, but we managed to find a duplex here that, with the rental income, we can afford. Not only that, but we're paying less to live here than our tenants, and we're growing tons of equity with the principal paydown. Househacking is a huge, foundational move for anybody who undertakes it.

The area that's going to work best for househacking is the area where you want to live. Since it's your home, you gotta be comfortable and happy there. It's worth losing a little ROI to keep yourself happy and sane.

That said, I'm a nerd about LA real estate, and I've started making some maps. Lemme screen shot my most recent, hold on...

Here we go:

 That's about the area you're considering mapped for median income. The colors represent current median income of each census tract. Dark red is $30K or less, bright green is $150K or more, and the gradients in between represent median incomes between $30K and $150K.

The arrows represent median income growth over the last five years. Big arrows mean more income growth. Small arrows means less income growth. No arrows means no or negative income growth.

When I look at this map, I focus on areas that are red with big arrows and near greener areas. These areas have relatively low median incomes that are growing relatively quickly, and they're adjustment to higher-income areas. In other words, these areas are the path of progress/improvement/gentrification -- whatever you want to call it.

I notice that inland Long Beach is quite red but with long arrows. That's good! Central Whittier is red and near green, but there's no arrow -- that's not so good. Bellflower has a lot of red and long arrows, and it's just above mostly-green Lakewood, so I'd look further into Bellflower, too.

All other things being equal, where would you want to live? Maybe we can start there and fine-tune the exact submarket you should focus on....

Best,

Jon

Ryan, welcome!

To continue your networking, hop over to meetup.com and search for "Riverside real estate" or "La Quinta real estate" or other markets around you. You'll find groups holding virtual meetups, which are excellent ways to network (second only to in-person meetings!).

I'd also strongly suggest you look into househacking. If you're not big on roommates (I'm not!), look into househacking a duplex, where you live on one side and your tenant lives on the other. It seems counterintuitive, but this is an excellent first step. You'll likely lower your cost of living (unless you're living for free at home, which maybe you are?), and you'll start building equity quickly in the form of principal paydown. In a year or two, you'll be able to move out and cashflow or refinance for more capital -- or maybe even both!

Good luck!

Jon

Hey buddy, welcome!

Obviously, this is the place for meeting other investors. I also recommend you go to meetup.com and search for "Los Angeles real estate." You'll find at least a dozen groups that are doing virtually meetups all the time. We're a big market -- meeting people is easy!

Tell us about yourself. What are you looking to do in real estate?

All the best,

Jon 

Christopher, I think it really depends on what kind of a shopper you are.

If you're a retail shopper looking for a dream home, I'd recommend waiting. I predict prices will pull back a bit next year when federal stimulus and forbearance programs expire. The real estate market lags behind the broader economy, and the broader economy just suffered a huge contraction and is still at 10% unemployment. The repercussions are being forestalled by stimulus and forbearance; I think both of those will end before our economy is back at its pre-COVID levels. If nothing else, bidding on houses probably won't be so intense this time next year.

However, if you're looking for a property -- either a SFR or a duplex -- to househack, it might still make the most sense to buy now. When you're househacking a property, you save on your cost of living and start building equity through principal paydown. The advantages there might be worth buying now even if the value dips next year. And if you're planning to hold onto the property for a few years, next year's dip won't make a difference.

I'm househacking a duplex now in LA. I bought last year and plan to hold for at least a decade (though I plan to move out in 2-3 years). I'm not at all concerned about prices dipping because I know they'll be back and higher when I decided to sell.

Why is your focus on Palmdale? There are affordable duplexes all around LA. Where in LA are you? Where do you want to live?

Best!

Jon

Christopher, look into the FHA 203(k) loan. Google "FHA 203(k) loan." This is a government-backed loan product that will lend you money to purchase and rehab a property with a super low 3.5% down payment. You'll need enough income to pay for the mortgage, but you don't need a lot of cash to get started! It's an undertaking to pursue this path, but you sound motivated. You can do it!

Good luck!

Jon

Renada, I'm househacking a duplex as a family of three. Convincing my better half to go along with the plan involved two things: Firstly, I had to find a duplex in the neighborhood she looooooves. We can't really afford to live in a SFR in this area, but I found a duplex we could afford with the rental income. Secondly, I made an Excel chart showing the difference between buying a duplex and buying a slightly less expensive house (which was our other option). Over 10 and 20 years, the equity buildup from the duplex blows a SFR out of the water. And I showed that we could move out anytime we want and cashflow on the property, which made it feel like less of a commitment for my wife.

Best,

Jon