Sumant Pendharkar has seen house values skyrocket since he moved to Los Altos in 1997, and he wants Los Altos residents to view the market increases as an opportunity, not a challenge.
Pendharkar, a financial adviser, recommends that people with high-value homes purchase a second home in the area – not as a vacation home, but as a home for their children.
“I’ve been noticing this trend in real estate,” he said.
He gave an example of one couple who purchased a two-bedroom Oakland condo for their daughter attending UC Berkeley as an undergraduate.
“It’s a no-brainer to buy at $500,000 and rent it out,” Pendharkar said.
He suggests that parents formalize a contract for their children to pay rent so that they can build a credit score and refinance the home later on. It’s a system he refers to as “The Bank of Mom and Dad,” and he has worked with parents of freshmen at San Jose State University and a couple who has a married son interning at Stanford University Medical Center.
The benefits are not just for the children. Parents can also use land ownership to help them later in life as a way to diversify savings.
“It does well for someone who has equity in their house,” he suggested, pointing to empty-nester Los Altos residents. “In order to develop a retirement stream, hedging into real estate is a good idea.”
Pendharkar scours the Bay Area to find investments that work for Los Altos families. He has found places in San Francisco for young tech workers and in Oakland for creative types, as well as in new developments in Silicon Valley.
“Buy what you can afford to keep,” he recommended.
He noted that investors can always hire a property manager to look after the place if their children move away, but it is expensive to refinance a place or flip properties. On the other hand, working with an adviser who can minimize capital gains taxes through a 1031 Exchange and who knows both real estate and mortgage can be an advantage.
“It’s a strength,” he said of his own background. “It allows parents to plan for their children’s education.”
Pendharkar also advised consulting with a realtor, as prices for a “starter home” in the Bay Area could range from $500,000 to $800,000.
“You’re providing a foundation for your child to build a career in the Bay Area,” he said. “It’s an important decision.”
And if your child leaves the Bay Area? Then the opportunity is even greater, because interest rates are low.
According to Pendharkar, the plan worked well for one local couple whose son attended Purdue University in Indiana.
“For $150,000, they bought his first home in cash,” he said.
For more information, call Pendharkar at 704-3840.