Should Mom sell house? Or rent it?

[Spenny]

Hi there my Mother is trying to make a real estate decision and is looking for advice.

She is getting a bit old at 70, and is having some trouble keeping up with an older house of 40 years.
She has some debt to pay off around 40k mortgage and 20k low interest cc debt.
No savings but has a decent pension income of around 30k/year.

We are considering a few different options but are not sure which is most wise for her age and for investment purposes. I'm just not sure how to frame the problem correctly.

1) Stay in the house:
She has enough pension income to pay her monthly bills but has little left over for enjoyment.
However it is an old house and things break down and she cant fix them, and realistically she only uses a couple rooms in it.

2) Sell the house (~300K) and buy an apartment for herself
Sell the house for 300, buy an apartment for 150, pay down her debt of 60, leaves her with 90 for investment/fun. My only concern here is that buying might be a hassle if she is going to enter a retirement home in a few years.

3) Sell the house (~300K) and rent an apartment for herself
I don't like this so much because she loses all the rent money she is paying and will have a lot of money just sitting around doing not much.

4) Rent the house and buy an apartment for herself
Would most likely hire a property manager. I like this option because she can always move back if she wants.

5) Rent the house and rent an apartment for herself
Would likely hire a property manager. I like this option because she can always move back if she wants.

For investment purposes I am thinking it might be best to rent the house out, and use that income to help pay for the mortgage on a new apartment. I think this would give her a much higher rate of return than selling the house and parking those funds in some low risk/no risk investment option. Although not actually sure if she can afford to buy an apartment without selling the house. what would she use as a down payment? Increase the mortgage on the house?

On the other hand I think she might just need simplicity. Sell the house, buy an apartment, no hassle..

What do you guys think? Is there a clear winner here? I am happy to provide more info if necessary.

Thanks a lot!

 

[Cory Sperle]

If she were my mother I would suggest selling the house, and buying the condo. You said it yourself simplicity is key and the hassle of renting the house would not be worth it in my opinion. You can encourage her to save or reinvest the 90K into in an income generating REIT as she is still investing in real estate without the hassle and generates a nice, stress free, income to supplement the pension.

 

[Seeley]

Sell the house and rent an apartment. Renting is the least expensive way to live and should be easily covered by her income and investment of the money from the house. At her age there is no point in owing anything as it will only add pressure to her life. Renting will set her up to easily move into a retirement home when she is ready. The reality is a retirement home is simply a glorified rental apartment.

Rent money is not lost it is simply the cost of housing.

 

[3canctheayr]

Some things to consider-

If the house she lives in is about 40 yrs old, and she's 70, chances are that mostly everything in the house is not very modern. If that's the case, you do not want to rent out a house that is old inside, even if it is in excellent condition. Old houses typically only attract the wrong type of tenants & you'd likely have to rent it at a discount to similar properties.

Renting for the right price isn't a waste of money - as another poster mentioned, there is a cost of housing no matter what.
How much does she spend just to live in that house now not including the mortgage? Taxes?, Heat?, Hydro? Insurance? etc.?, Upkeep? All these items are part of the cost of housing. How much is she paying in interest annually?
Upkeep includes the cost of wear and tear and depreciating items in the house such as kitchen and bath, flooring, paint, wallpaper, touchy feely items - ie. doorknobs, light switches etc., fixtures, Roof, and all exterior wear items.
An easy rule of thumb to calculate the true cost of upkeep is to take the cost to build a brand new similar house, then divide that price by about 40-50(depending on quality of build etc.). That number is the true annual cost of upkeep on a house over time, which accounts for inflation etc.
ie. on a house that would cost $250,000 to build today(not incl land), the true upkeep cost over time on that house is about $5000-6250/yr.
The house I currently live in cost about $19,000 to build in 1972-3. It has easily had that much spent on it on upkeep over the last 40+ yrs.

Chances are she is paying at least $12,000- 15,000 per year or more just to live there when all the true costs are added up.

If she can rent for the same, or less than that number, she's likely better off renting.

 

[Neil1]

Where is it? Doesn't the answer also depend on whether the area is in transition or not for example?
Can you manage her home for her? It might be a good investment for both of you, better than selling whether she moves out or not.

 

[Thomas Beyer]

Selling and reting or buying a condo makes sens to me.

What about her selling you the house, say for $260,000 with a $60,000 payment by you to her so she can pay off her debt, and a $200,000 non-secured personal loan @ 5%, so $10,000 payable to her or $800/month. You then rent the house and keep the difference. You get a new mortgage, if you want. Presumably you will eventually inherit the rest and the loan disappears. You have a rental property and mother gets monthly cash.

Or, you both go on title. You get a new mortgage and with cash buy a condo for mother in your name that she rents from you for $1/month until she passes.

Think along those lines.

Win/win.

 

[Spenny]

Thanks so much for your responses!

So it looks like 4 votes for selling the house, which I take very seriously considering this is REIN who would be partial to renting it if it was worth it.

Split on buying or renting an apartment, I see there are pros and cons to both approaches. As a result of this thread I have realized that renting is definitely not a waste.

Thanks Thomas for your creative idea! I would consider that if I had 50k at hand but I don't. Also I have two siblings who would receive an equal amount of any inheritance, so it's a bit more complex. However this got me thinking that perhaps I could buy the apartment for my Mother to rent in time.

Thanks again and if anyone else has any creative ideas do let me know!

 

[Seeley]

My brother and I had a identical situation with our father. He decided to sell his home and move to a rented condo paying $1200 all inclusive. The money from the sale of his home ($180000) was divided between myself and my brother to invest how we chose with the understanding we would insure he maintain his standard of living for the rest of his life. He eventually moved to a retirement home of his choice comparable to the condo. The retirement home costs $3700 per month. All of his pension income goes toward his housing cost and we annually top up the short fall by each contributing $6000. This covers his income short fall as well as giving him extra pocket money.

With you having two other siblings and your mother having a income of $30K your mother should not have any future financial concerns. Once she moves to a retirement home, assuming she ever does, each of you could contribute $5000 per year and she will not have a worry in the world. Assuming each of you accept the responsibility of insuring your mother is well taken care of for the remainder of her life. The only risk is greedy siblings that only care about themselves (have a lawyer draw up a contract if necessary).

If one sibling is not agreeable then only divide the money from the house sale two ways or receive it all yourself if nether agree. The sibling(s) not in agreement essentially get no inheritance. Those that receive early inheritance take on the responsibility of supporting your mom when she needs it. The plus is that investing the money now when she is only 70 in your name is that investment will grow. Should she remain in a rental apartment till the end of her life you may never have to use it. As long as she is in the rental apartment have her annually transfer her surplus income to you as well. This way when when she does pass there will be no inheritance tax to pay.

 

[Thomas Beyer]

Mother could gift money to children, or in kind, namely the downpayment.

Or transfer house to all three kids, then get a new mortgage.

Or just to you, you re-fi and pay your siblings their share in cash or future payables.

Then rent out and do a loan deal with mother so she can buy or rent a condo.

Many creative options that could/should be considered in a house with loads of equity !

I'd rent a condo as anything less than 5 years with realtor costs, legal fees, etc might not be worth it to buy, then sell again shortly. More flexibility with renting.

 

[Nir]

How about your mother stays in her home, you move in to one of the rooms not being used.
Help her as needed in the house and there is no need for her to leave.
Plus you get extra quality time with and for your mother.

 

[nationwide]

You need to check with the market first, how much you are getting from the current property and for how much you can get a similar or less similar property. I hope you can get better deals, i don't prefer to sell the proper and rent something as compare to have something of your own.

 

[dpeacock]

70 is not that old, unless your Mom's health isn't so good. If she sells the house and takes the cash, you might expect 4-5 % of 180k for life, taxable, to some degree, so maybe 9,000 per yr pre tax, and indexed, for life. You could also buy an annuity, which is a pension for life, with the house proceeds, but she would be accepting low internal interest rates for her lifetime, hence a modest monthly pension. If you were to buy the house from her, by way of an Agreement For Sale, renovate, rent and manage it, you could pay her a monthly income out of the rent you collect. It's likely rents would increase over her remaining lifetime, and would hopefully provide her with a lifetime income.
If you get to the point where you've paid out all that you owe her on the house, well, she is you Mom, so you just keep giving her the rental income until she passes.
This way your Mom has an income for her that will appreciate with inflation, provide her with an increasing monthly income for life. Assuming the house is is an area that will keep up with inflation at the very least.