Studio in SF bay area - keep or toss?

Question

I'm a trustee of an SNT trust. The beneficiary is asking me to sell their current home (they live in it) and buy  them a better place. The problem is that both properties would be in SF Bay Area, so I will have to finance the second home, there is no enough cash in the trust for the all-cash offer even if I sell the current property.

I can get roughly $300K for the current property (after all expenses and taxes) or rent it for $16-17k a year (after all expenses).  I will likely have to assume a capital gain at the time of the sale (taxable to the trust at 20%). I'm debating if I should keep this property as a trust investment because it is so hard to fund anything for 300K here!

Keep or toss?

Thank you!

Sophia Maler · Answer

Deanna, I went through all this with them. I bought their current place (tiny studio, not really a home for two, just a place to crash at night) in 2014, because the market was crazy and all I could get was this place (I had to beat 10 offers).  This place rents for about $1600-1700 a month. They live it it now.

Last week they found a nicer home and fell in love with it. If I rented a similar place for them, I would have to add about $500 to $600 a month from the trust funds. It would eventually deplete trust funds. There is no way to invest $200K to produce this much cash a month tax-free.

So I'm thinking about buying it for them instead. The current place is very difficult to loan, so I will have to mortgage the larger unit and use the rent from the smaller one to pay the mortgage.

So here are the numbers:

Current unit:  $320K market value / $1600 rent

Larger unit:  $540k market value/ $2400 rent

I would love your thoughts!

Deanna McCormick · Answer

AS trustee you are to work in the best interest of the SNT Special Need's Trust for the person it was set up for which is a huge responsibility, I know I'm also in your shoes as a Trustee for same,  a lot rides on making this change for them, and is it really sensible? what has changed that this would even be a consideration, You don't have to say yes.. if it's because the house is no longer feasible to suit there physical condition, due to access or other features I may agree to looking but the funds can also be used to remodel and upgrade current house to fit their needs.

I would sit back and really look at the situation from a NEEDS standpoint,, not a WANTS stand point and don't be pressured into doing something that will jeopardize a suitable living place that is currently sufficient.

Sophia Maler · Answer

Claira, I don't have a spreadsheet or pros-cons analysis list. I didn't do this before, seems like I need to do some homework.

My other option is renting out the current property and finance it. I can use the cash from the financing for downpayment on a more expensive, better property.  There should be enough cash in the trust to pay for the rest of the second property. I just need to be careful with the financing to make sure the rent is covering it.  I'm not sure this plan holds water though.

Claira Thomas · Answer

i feel that you answered it by saying that's 'it's so hard to fund anything for 300k'

* can you link a spreadsheet?

* or a pros-cons analysis/list?