Thanks so much for the great comments and advice on my previous post about this topic. As I said in a reply, I’m making a list of all the ideas commenters shared to discuss with my husband. We may or may not move forward with this idea—there are some complicated family dynamics that I won’t get into in this particular post. But if we do, here are some of the numbers we’re considering.
- I’ve been looking at small starter homes or condos in either our town or the one 10 miles north of us. They’re mostly 3 bedrooms, but some are 2 and a couple are 4. The price range I’ve set is $450-650K. (I know that’s horrifying. It’s California.)
- Zillow does a pretty good job of estimating what your monthly payment would be, and you can adjust it for a larger or smaller down payment. If interest rates drop, we could make a smaller down payment. At this point, we’re looking at a down payment in the $200-300K range.
- Zillow also estimates what kind of rent could be charged for the property. I’d like our total house payment, including HOA (if applicable), property taxes, etc., to be $2500-3000. How much rent we could charge will depend on the size of the home and whether it’s one or two paying roommates. According to the Zillow estimates, the types of properties I’m looking at should rent for that range.
- We won’t charge our daughter rent if she’s going to school, and since we’ve been paying her rent since her latest car accident, this will be a wash for us. If she finishes school and is working full-time and wants to stay in the house, we’ll start charging her rent.
- So we’d make a down payment large enough to get the monthly payment manageable. Our daughter would have a decent, stable place to live, and we’d more or less break even, counting another tenant(s)’ rent and what we’re not providing for her rent.
- The down payment will come from a combo of cash we have in high-yield savings accounts (a bit over $200K right now) and a home equity line of credit from our current residence (we have about $350K of equity in our condo). We have money in our IRAs that could be used for this purpose, but the tax hit when we’re both still working is a daunting prospect. It makes more sense financially to pay the interest on a HELOC than to pay the taxes on an IRA withdrawal—at least for now. This could change when my husband retires, and who knows what the tax rates will be after 2025?
- With both of us still working, excellent credit, and no debt except for our own mortgage, we should have no trouble qualifying for the HELOC and the new mortgage.
- I will find a local realtor to help us with the purchase. I realized that we haven’t done this since we bought our first home in 1992. Our second home was purchased from friends, and we didn’t use a realtor. Our third (current) home was new construction, and we bought it directly from the builder. We have, of course, employed realtors to sell our previous homes. We might use the same realtor who helped us sell our previous home. She’s very well connected in the community (her parents were realtors in our town, too) and probably could give us good advice on investment properties.
- We have enough income available to cover any gaps in rent or repairs for the property. It won’t put us on the edge financially.
- If our daughter moves on after a few years, the rental market where we live is strong enough that we shouldn’t have trouble finding good tenants.
I still don’t love the idea. I’m sure I can climb the learning curve about the business side of becoming a landlord, and since I’m months away from retirement, I’ll have more bandwidth for that kind of thing. But I’m pretty risk-averse financially and also don’t like the idea of the ongoing stress and hassle of a rental property. This plan is based on solving a family problem, not making a savvy financial move—but obviously, the implications ARE financial, which is why I’m posting about it here. I’ll follow up with what we decide to do, including why not if we DON’T do it!
(Now moving a struggling young adult to financial independence—-that will be a different post…)
Good luck with your daughter. Our middle son had struggled since around 6th grade. 4 high schools in 4 years. We had to send him to boarding school his senior year to get caught up and graduate, to the tune of $40,000. Lots of anxiety, OCD and depression. After graduating HS he tried community college but soon dropped out and worked a series of entry level jobs for the next few years. Open heart surgery at age 23 to replace an aortic root and an artificial valve. He drifted for a few more years, lived in a van for awhile still dealing with emotional and physical issues. Finally, after seeing both his brothers getting Masters Degrees and establishing themselves, it lit a fire under Greg. Went back to school, did remedial classes and was accepted into an accelerated nursing program. He excelled in the program, graduated among the top of his class and is now in his second year of being an RN. Just bought a house a few months ago. He still has some anxiety issues but has worked thru so much! Greg is the definition of a ” late bloomer”. We supported him financially thru his school years, but it goes to show that it’s never too late! Sorry for the long post.
That’s great to hear! Closer to home, my younger brother floundered around for decades, never finished college, had to file bankruptcy, had depression and substance abuse issues…culminating with quadruple bypass surgery at age 47. But now he’s 52 and finally has a stable, well paying job and good benefits. It gives me some hope that our daughter will figure it out in time.
Regarding taxes please consider reading the 2023 IRS pub 527, particularity the part about what constitutes personal use that begins on page 27.
https://www.irs.gov/pub/irs-pdf/p527.pdf
I hope you find good solution to your family first issue.
Best, Bill