Need advice - too many options

6 Replies

I'm writing this for my Mom and I'm looking for some unbiased advice here as I don't know too many people yet in the RE investing game. Here's the situation. 

She is 71 years old, owns a home in San Diego that can probably sell for at least $1.5M right now in this market. She owes about $371k on it.  It's a 6BR house and while she has 2 roommates, it's still pretty big for her and doesn't really need it anymore. Her goal is to live in San Diego for at least the next 5 years while she continues to work, retire comfortably and if possible, create some passive income on the side although safety and security are much more important at this point due to her not having much else saved up and few working years left. 

Without sharing some of the advice I've already received, I'd like to know what the best options for her would be.  Here are several as I see them in no particular order.

- Sell now, downsize and live mortgage free and invest the difference or buy a rental property

- Rent out her home (she estimates she can get around $6500/mo for it) and rent somewhere else temporarily. 

- Refi and get an interest only loan, pull out about $300k in equity from her home and buy a rental property

I'm sure there are tons more options and lots of variations here on how to do it.  I think being financially secure and the least risk is paramount as her house is her biggest asset and can't afford to lose it. Thank you all for reading and I'm eager to hear the feedback/advice.


Some things to consider

  • Prop 13 is likely resulting in huge annual property tax savings. 
    2 of 5 years occupancy would mean much of the gains, possibly all, are tax exempt. 
    at death there is currently a step up basis in value.  
    1031 is not an option currently because it is owner occupied.  

I would be hesitant to sell any property with that type of prop 13 savings. 

Good luck

I think the toughest part with selling and downsizing is all of the costs that incurs. Selling into a hot market also means buying in a hot market. She's going to incur some healthy transaction costs. Additionally, if she gets a mortgage on the new place she'll totally reset her amortization schedule. As it is, her monthly mortgage payment is probably mostly principle right now, meaning she's probably not losing much money to interest. 

Becoming a small time landlord in California right now is not exactly what I'd consider low risk. I also think any additional leverage adds additional risk which might not make sense at this point in her life.

@Garrett Binder , the big issue with any option is: what does your mom want?  As noted, moving is a pain in the butt, and 5 years will come faster than she is ready.

But is the house actually too much for her to maintain?  Does she WANT to be a landlord?  Even with a management company, she will have to act as an asset manager and oversee the manager.

You hint at a couple goals of hers: retire comfortably and create passive income.  Does she need the nearly $1mm of equity cashed out to retire comfortably?  The passive income will likely come from NOT directly owning real estate, and there are many avenues she can take, if she sells, to create that income both inside and outside of real estate investing.  Is she okay with becoming a renter?

@Garrett Binder In this situation, I would recommend looking into a specialized 1st position Heloc, known as an "Offset Mortgage" overseas. My wife and I ReFi'd our property in Murrieta into one, and it's been great. 
It's a line of credit set to 80% LTV, with a 30 Year draw period. It's tied to a zero balance sweep checking account, so every deposit is swept directly towards the remaining balance on the loan, lowering interest cost. With qualification, the line of credit would be set to $1.2M. So she'd have $829,000 available at close. While she's working, every deposit she makes will lower her balance, save interest, and increase her line available to pull from.
It provides the most flexibility, increases cashflow, and is very tax advantaged. Many clients love getting it set-up before retiring, because funding becomes much harder to come by post-retirement. 
I'm glad she has you to help her work through these decisions! I hope all works out well for you all. 

@Justin Phillips thank you, never heard of that so I am grateful for the new tool.  Will definitely look into it.

@Evan Polaski - great feedback and good questions thanks. Does she NEED it? I'd say only in case of an emergency or if she gets laid off her job. I think my main concern is if she doesn't do anything now while the market is red hot, what if it does dip a little (or a lot) and she loses $200k or something on her property value just because she didn't want to act now? I know you can't foresee the future but from what my other RE investor friends are saying, it's a sure possibility. 
She has her own investment portfolio managed by someone that's doing just OK.  This would be more of a proactive move; downsizing to a house her size, moving from 2 story to 1 story so no more stairs for her, getting rid of roommates, eliminating risk of losing $ in the future if the market crashes.  To your point though, one thing my mom is not, is organized. She would be a terrible landlord I'm guessing and my hope is she finds a great property management company to support her if she chooses to rent (which she is leaning to do). 

@Taylor L. I agree w/ you completely. She likely wouldn't buy again right now if she were to sell.  She may rent or if she does go and buy, it may not even be in CA.  Overall, what you said was my entire thought process going into this. Thank you