Turning a Sacramento Home Into a Soft Retirement Plan

[Brianna Billings]

Hello BP Fam!

I wanted to reach out for additional feedback on a retirement or soft FI strategy I’m helping someone think through.

My friend’s dad, who lives in Sacramento, wants to retire but currently doesn’t see a clear path with his 401(k) or other investments. Thankfully, he bought his home in 2001 for around $350K. He still owes about $250K, and the property would likely sell for around $800K today (I’ve rounded these numbers to the nearest $50K for simplicity).

He also has approved ADU plans, which would cost about $50K to build. However, he doesn't have the funds available right now to move forward with construction.

I’m trying to help him come up with a plan and have outlined a few options for him to consider. My initial thought is that he should find a way to rent out the property in some capacity since this home is already a secure and familiar asset. Once he sells, there’s no going back, so holding onto it and generating rental income seems like the safest option.

Facts: 

Loan: $250k

Equity: $500k (Value - Loan)
Monthly Payment: $2,000

Home: 5 BR 4 BA w/ Garage. No HOA. ADU plans include converting garage and downstairs bed and bath into 1BR, 1BA ADU.

Analysis:

Option #1: Live in home, rent out studio; Total Cost: $50k studio conversion (how to pay?); Monthly Income: $1,200/mo

Option #2: Live in studio, rent out home; Total Cost: $50k studio conversion (how to pay?); Monthly Income: $2,950/mo

Option #3:Rent out home, rent elsewhere; Total Cost: $2,000 (general repairs); Monthly Income: $2,950/mo - (cost of rent)

Option #4:Sell then repurchase; Total Gain: $500k (untaxed if sold as a couple); Total Cost: Gains - $(cost of new home); Pros: Get rid of mortgage if you buy under $500k. 

Note: Even when you "get rid" of mortgage payment by purchasing a home in cash, there will still be expenses such as property taxes and general repairs.

Other Ideas:- Rent out garage for storage ($150/mo); Rent out individual rooms (maybe $800/mo?)

Thanks in advance for any input! 

Best Regards,

Brianna

[Jules Aton]

There are many variables to consider like age, expenses, savings and social security projection. How is he with money? That is a lot of house for one person. I’m curious about the balance on mortgage it seems that should be lower. He is very fortunate to have the appreciation and you are correct that he should protect that nest egg. Once he sells he could invest the proceeds in stock/bond ratio that is appropriate for age, situation so it isn’t like the money disappears. I’ve seen more than a few cases where RE investments went sideways as people got older and weren’t able to manage so I’m generally in favor of liquidating for passive income before that happens. Lots of moving parts and extremely high stakes, I would probably turf this off up a good fee for service financial advisor.