by Ashley
Has anyone seen this awesome calculator from the NY Times that tells you whether its better (financially) to buy or rent? I love all the different variables it takes into consideration when making the determination!
Check it out HERE.
I’ve been playing with it, inserting different figures to see how it impacts the outcome. It’s crazy how detailed it is – including many variables I’ve never even thought of (e.g., home price growth rate, rent growth rate, investment return rate, etc.). It seems to be extremely detailed and I like how simply playing around with the chart has made me think about things I otherwise wouldn’t even know to consider.
Meanwhile, in Wimberley, Texas…
My Dad owns a property with quite a bit of land. He has about $100,000 in equity in it and I’m of the opinion that it needs to be sold ASAP. The upkeep is incredibly costly and since my Dad won’t be living there anymore, I don’t want to fool with it (e.g., trying to get tenants, trying to make sure tenants pay, doing clean-up and make-ready when tenants move in/out, etc.). My brother is of the opinion that the property will appreciate quickly, earning us more money (in terms of equity) than it would if we were to sell and pull out the equity now. I think on average the price of homes have been appreciating about 5% per year (compared to the stock market‘s average 10% annual rate of return), so I think we’d do better investing the money wisely. Thoughts?
Just FYI, we have a meeting tomorrow (I’ll be conference called in) with an attorney to discuss establishing a trust with Dad’s assets. We’ll also meet with a financial advisor to get his/her advice on the situation (and likely meet with a realtor to get his/her opinion on the home’s value, etc). But just throwing this out there for you fine folks, given the incredible wealth of knowledge that you are. I’d love to hear your opinion(s)!
Hi, I’m Ashley! Arizonan on paper, Texan at heart. Lover of running, blogging, and all things cheeeeese. Freshly 40, married mother of two, working in academia. Trying to finally (finally!) pay off that ridiculous 6-digit student loan debt!
I assume that you don’t have to sell now in order to assure that your fathers needs can be taken care of, but will you need to in the near future? If there is that possibility, you won’t be able to just push renters right out the door. If it isn’t going to be necessary to sell it for financial reasons and your brother doesn’t want to do so right now, is he willing to do the work and put in the time to rent it? If not, then it is probably best to sell and invest the money where it is more easily managed.
Lots of good questions! We do not need to sell immediately or in the near future, for that matter. He has other assets that can provide care for hopefully at least 5 years before we would really NEED the equity from the home. In terms of your other question (is my brother willing to put in the work and time to rent it???), I would guess no. But I can’t be sure. Likely scenario is we would end up having to hire a property management company.
Sell it asap! Whether you turn it into a long distance rental or let it sat vacant, there’s so much that can go wrong! The overhead costs of keeping it; plus potential maintenance and repairs, add up quick. That’s before even considering what tenants could do to it! Your dad should take the money and run!
I recently saw a news article on our local news. The tagline was Renter’s Ruined Homeowner’s Dream Home or something like that. The lady had bought the home and later married and moved in with her new husband so she rented out her house. 3 years go by and she is receiving timely rent payments and basically has a dream renter. They never call for maintenance or anything. Finally, a former neighbor looked her up on Facebook and told her she needed to check out the house. It was as bad or worse than anything I’ve ever seen on Hoarder’s!
Wow! So scary! Of course, that’s a bit extreme but even with your regular run-of-the-mill renters there’s always some type of damage. I’m just very adverse to trying to use it as a rental property (doesn’t help that my mom is a real estate broker, has done property management in the past, and has drilled it into me that it’s the devil! I’m being dramatic, of course, but I’ve heard SO MANY HORROR STORIES!!!!)
i think wimberley will keep appreciating.
That’s my brothers’ argument. He thinks the value will skyrocket within the next 3-5 years.
Hire a property manager. I know a good one in southAustin. Maybe he would do Wimberley too.
Second the property manager. A good one will be worth every penny of their fee and then some.
If we end up going that route I’ll definitely shoot you an email to get your contact’s name! Thank you!
Can’t count on getting 10% in the stock market these days…
True, but it wouldn’t be hard to beat the 5% per year that the home is currently appreciating (though Wimberley is thought to explode soonish – next 3-5 years).
Trusts are tricky. Listen to the attorney carefully. If you don’t like the answers, seek a second opinion.
Thank you!!! This actually is our second opinion after we all 3 were really off-put by the last attorney we met with. The last one advocated no trust and just doing a detailed will (dad currently has no will). Seems like really dumb advice when our concern is to protect his assets WHILE HE’S ALIVE, not after he’s dead (though, of course, a will should be in place, too). Probate is not the issue here. So, yeah. Hoping for better luck this next consultation.
Some states have look back periods for years regarding assets put into a trust. E.g. if the assets are put into a living revocable trust in X state and that individual eventually needs medical assistance from that staye because they have exhausted all their financial resources or don’t have long-term care insurance the assets of the trust can be pierced so to speak.
When my parents set up their trust, they were told that the trust would protect their home from having to be sold to pay for medical costs. Not sure if its the same in Texas, but if so, your dad may want to keep the home in the trust to protect those assets. Your attorney will be your best source of advice – ask lots of questions and don’t be afraid to say you don’t understand something and need more clarification. You’re going to get lots of information so take notes….and then maybe a second discussion with the attorney with follow up questions.
As to the bigger question of sell the property or wait there are two schools of thought. 1. Get rid of the property to get rid of the hassle and keep life simple for your dad and your siblings – the less stress you have to deal with the more you can concentrate on him and his health or 2. Never make a big decision in the middle of a crisis…..close up the house and revisit the question in 3 to 6 months.
Hope this helps!
Yes, definitely talk to an asset protection/estate planning person. My dad worked in nursing home administration for a long time and he told me so many stories of people whose inheritances disappeared to pay for long-term or end-of-life care, which could have been avoided with proper asset protection and estate planning. This happened to my grandparents – over $250,000 vanished in a few years and nobody got an inheritance because the kids couldn’t agree on how to do estate planning.
I don’t remember if it was Medicare or Medicaid that was paying the bills but the rule was that whatever it was would not pay until the patient’s total personal assets were reduced to $1500.
Yes, I’m familiar with this. And, of course, the types of places where he’s looking to live (his first choice is a 2-bedroom in an independent living community) run nearly $6500/month!!! That includes everything (all utilities, food, activities), but thats a TON of money! So careful estate planning is going to be crucial! NONE of us want to be in a situation where we run out of money when he’s in the MOST need of full-time care. We’d rather have him come live with us NOW while he’s still independent. He won’t be this way forever and I cannot imagine the stress and pain of being forced to have him move in with us when he’s confined to a bed and dependent upon us for everything.
That’s a really good point about the possibility of shelving the house issue for a bit. We don’t have an immediate financial need to sell (he’s got other liquid assets available), so no reason we can’t think about it for awhile.
I don’t remember the details, but I think it will be impossible for your dad to live alone in the house? Is there a possibility of someone moving into that home with him? There are special legal and financial rules (and loopholes) around a primary residence, so if there’s any way it could work, I’d ask the attorney and financial advisor if there would be any benefit to keeping the house.
I don’t think so. Both of my siblings live and work in the north-Austin area (about 60-90 minutes north of my Dad’s Wimberley property). I don’t think either of them would be willing to relocate their families and deal with the commute. We’ve talked to my Dad about hiring a personal care agency to have someone come live with him and he’s 100% opposed to it. So there’s no way he’ll be able to stay in the home. He’ll have to move to be closer to my siblings on the north side of town. Right now we’re looking into different assisted and independent living options.
Comparing returns on real estate vs. the market is a little tricky.
I don’t know what kind of property this is, whether it’s land or a single-family, or something else. But in a traditional rental property, keep in mind that you make money in 3 ways:
1. Appreciation in value – Austin area continues to see rapid job and income growth and Wimberley will benefit, although the market will probably not appreciate as fast as Austin proper, but it has been on a roll over the last few years. If the Fed starts ticking up interest rates this month as predicted, prices will begin to moderate in the next year or two. Even so, to be conservative, maybe just model that the Wimberley property will appreciate 2-3%/yr.
2. Reduction in mortgage – If you are renting the property to a tenant and the rent covers the cost of the mortgage, then you also enjoy the benefit of gaining value in this way. It depends on the term of the note and where you are in the payoff cycle how much value you gain from this. It could be another 1-5% of the remaining balance each year if you are in the beginning or middle of a 30-year mortgage payoff.
3. Cash flow from rent: If the rent exceeds the costs for debt service, maintenance, and property management, you also may get some positive cash flow from renting out the property. Maintenance expenses will reduce this cash flow so be sure to factor that in.
Bonus: Tax benefits: The IRS allows you to take a depreciation expense on a rental property, so a lot of times, a rental property actually APPEARS to be negative income even if you get a little positive cash flow. So you might be able to deduct a little of your income and save a few bucks on income tax.
Here’s how to calculate the value you are getting from the rental property:
(Expected $ value of appreciation in 1 yr) + (Mortgage balance reduction in 1 yr) + (Cash Flow from rent) = Total return for 1 yr
Example if the house is worth $300,000 and you have $100,000 in equity, the value grows at 3%/yr and you get $200/month in positive cash flow after all expenses:
3% appreciation on $300k = $9000
+ ($700/month mortgage balance reduction) = $8400
+ ($200/month cash flow) = $2400
1 yr Total return = $19,800
5 yr Total return = $99,000
Split in 2 between you and your bro = $49,500 each plus you still have the original $100k equity
If you sell the property today and it’s worth $300,000:
Sales Price: $300,000
– 5% Real estate commission: $-15000
– 1% Closing costs: $-3000
– Remaining mortgage $-200,000
= $82,000 Cash.
Divided by 2 for you and your bro: =$41000 each
(Also possibility of capital gains tax depending on how the property is transferred)
Invest $41000 in market
5% return = $2050
10% return = $4100
10% for 5 years = $25030 total return + your original $41000.
So it ultimately depends how you feel about where the real estate and stock markets are headed, whether you want to hire a property manager, and if you are comfortable with having the money tied up in a house vs. getting the cash out. But I think renting out the property could be a real winner in Wimberley for a few years. We kept our Austin house for this reason. Look at how fast rent prices are going up in Wimberley (bottom of this page): http://www.zillow.com/wimberley-tx/home-values/
But getting the cash out is also not a bad option. you could pay off a lot of debt and if the debt is 8% interest you get an immediate 8% return. Be sure to consult with a tax advisor on how to transfer property as the way you do it could have a big tax impact.
I’m so glad you commented here! I knew you’d have some great insights!
One thing to clarify though (totally my fault because I definitely used pronouns like “our money”). We have no intention of taking any of this money currently. My real hope is that if we liquidated all of my Dad’s investments we could invest it and earn enough on our investment to pay for my Dad’s care just out of the annual return. So none of it would be split between siblings, at least at this time. If we do not have enough assets available (or his care is too costly) to allow us to live only on return dividends, then we will have to start dipping into the actual nest egg. Eventually it could run out and we will be forced to sell the property anyway in order to continue paying for our Dad’s medical care. We have not met with a financial advisor yet (want to get the trust established first before we do anything to existing assets), so that will shape how a lot of the investment strategy works out. My Dad has accumulated some degree of wealth, but he was also anticipating working another 10 years (which would be his highest earning years of his career). Fortunately, he only has mortgage debt and a few unpaid medical bills (not in collections – just saying there’s a little bit of debt and I’m working with medical entities to set up payment plans). So overall he’s in a pretty good place. The last factor is how long he will live. Our specialist said it could be 2-20 years. Pretty big range. We already have an appointment with a new specialist in Texas and will seek a second opinion. Our investment plans for 5 years will be wildly different than if we need to make money stretch 20 years!
I would suggest you meet with a financial advisor sooner rather than later. Find a reputable fee only advisor. They can also give you insight about how to structure the trust, etc.
Personally, I wouldn’t want there to be any animosity between me and my siblings – and the idea of renting this property out does not seem like a way to avoid conflict – if one sibling is taking care of the property are they expecting to be compensated differently? Everyone thinks their family won’t fight about money, but death and dying do weird things to family members. Do any of your siblings have money issues, or do their spouses?
I am not implying you have greedy family members I am just trying to be realistic – when my dad’s mom died it was one big fat craze-fest which ended up with my dad cutting off contact with two of his siblings because they ended up stealing a lot of money from my grandmother prior to her death and shortly after she died. No one saw any of that coming and it probably could have been avoided if there was better planning.
I am so sorry that you and your family have to go through all of this now. I hope you all reach an agreement amicably.
Ummm….yes. I’ll just leave it at that.
But, because this is the comments section, I’m terrible with over-sharing, and my family doesn’t read the blog, maybe I’ll expand just a little ; )
My sister and I have already discussed the sad and very distinct possibility that this situation could forever ruin our relationship with our brother. Right now everything is fine. But I do not have confidence it will remain that way.
That being said, hopefully the trust will help protect my Dad’s assets while he’s alive. My sister is listed as the durable power of attorney and I think she will do a fantastic job in that role. I’m the secondary and I will certainly help in any way that I am able. I’ve already been paying my Dad’s bills and all 3 of us siblings are trying to share responsibilities so we don’t get burned out. Again…right now everything is okay. In the future…?????
You don’t mention what your father wants. I’m assuming he is still capable of making decisions or he would not be allowed to set up a trust or sign a will.
We’ve consulted with our Dad regarding his wishes (on short-term AND long-term) immediately as soon as we got a “hunch” of his possible health issues (before we received an official diagnosis). Unfortunately, his health is in such a state that he is unable to really follow-through with a lot of the things required to make these decisions go into effect. He’s signed a power of attorney so we (technically my sister) can make decisions on his behalf. At every step we’ve asked his thoughts and opinions but, ultimately, the stress is a lot for him to deal with and only causes further impairment with his health. So we’ve tried to simplify things for his benefit and final decision is up to sister (who is 100% keeping his best interest and wishes in mind).
How bad was his property affected by the flooding over this past Memorial Day weekend? I’ve been curious about that ever since you said he had property in Wimberley. (If all my ducks were in a row, I’d be interested in taking a look…but I have some chickies not falling into line just yet).
Prices are going up (my bf lives in San Marcos and has already seen his home equity rise $30k, and he just bought in October), but I don’t know what the plateau is. I guess too many Californians have moved to Austin, and now they’re looking for a little more space?
Wow! A $30K increase since October is incredible! My Dad’s home is on high ground so there was no flooding, but there was damage to his roof. Luckily, insurance covered it so he actually just last week had the whole roof replaced for nothing out of pocket.
Sell it. The main reason is risk. While there could be an upside of 5% appreciation, there could be a down side, the real estate market could change or you could have bad renter’s or the list can go on and on and on. At this point in time, you really have enough on your plate as I’m sure other members of your family do. There is no reason to add this to the mix. To think about it another way, if your Dad didn’t already own this property, the family wouldn’t be sitting around trying to purchase a property or investment that they woukd earn 5% on it in a year. You don’t need the headache and its not like it is a guaranteed investment where there is no downside. For that reason, risk is always involved and I would simply sell the property and simplify things.