Time to help out a reader, Marke, who is facing a tough decision. His home has lost value, like many people today, and he’s not sure how to handle it. However, it’s not just his house he’s worried about. He’s nearing retirement, and needs to start planning for that, too.
It seems that keeping his house and saving a large amount for retirement are in direct conflict with each other. Marke would like some help trying to figure out what to do.
- Age 59
- No retirement savings.
- Home has lost $250k in equity.
- Mortgage payment $1,700 per month.
- Owns a small vacation cabin with no mortgage.
Marke is trying to decide which option will work best. Of course there are many more details than those provided here. However, many of those are emotional aspects, like quality of living, that only Marke will be able to answer himself.
1. Stay in Home
If Marke stays in his house, he’ll pay it off in 10 years. He’ll spend $204,000 in payments ($1700 x 120 months) over those next 10 years. He’ll have to work diligently to save for retirement in other areas of his budget, which may or may not have a big impact on the amount he’ll be able to save.
2. Sell Home and Save for Retirement
Since Marke has lost considerable equity in his home, if he sells it, he will break even after paying off the mortgage. However, if he sells the home, he’ll plan on saving the $204,000 that he would have spent on mortgage payments for the house and save it for retirement. I’m guessing he’ll live in the cabin if he chooses this route. Otherwise, he’ll have to subtract the cost to rent another place out of the money now earmarked for retirement.
3. Rent the House
The last option he is considering is to rent out the home with a negative cash flow, live in the cabin and hope to sell it someday. Unfortunately, this option probably won’t help him generate any additional funds for retirement, but it might allow him to live in the house after it’s paid off.
What Do You Suggest?
Let’s help Mark out! I’ll highlight your suggestions and add mine in a future article.
Should Marke keep his house? What’s more important saving for retirement or owning a house?
Should Marke keep his house? What’s more important saving for retirement or owning a house?
When you put it like that, I’d say saving for retirement, since although we all need somewhere to live, we don’t actually need to *own* that house. Additionally, he actually has two houses, one of which he already owns.
But the key decider for me in which scenario I’d choose boils down to which asset class Marke believes will provide the highest return over the next decade: housing or wherever he’d put retirement savings (& remember to factor in any tax advantages here).
Factors such as how much his house is worth now (presumably quite a lot to have lost 250k in value) and what it might be worth in the next 10 years or so would be my starting point. Scenario based planning would help with this, taking several different estimated future house valuations and working out whether the financing costs of the mortgage provide a good return.
One solution not mentioned is to sell the cabin, which is another option I would consider.
I will think about solution for Marke for working towards retirement, but one thought is equity management strategies with the vacation home. Read the Missed Fortune books for advice.
But as far as losing equity on the primary home aren’t you inflating the true amount that he has lost. Maybe on paper he has lost that much from what it was worth at one time, but really he has only lost the difference between what he paid for the home and the amount that he has paid down the loan value.
ie Original home cost $300,000 – 20% downpayment or $60,000 so loan of $240,000. If he has paid down the loan to $200,000 he has gained another $40,000 in equity and now has $100,000. If the house is now worth $200,000 he has lost that equity, but if the house went up in value to $350,000 during the boom and now is worth $250,000 he realy hasn’t lost the $150,000 but rather just the $50,000.
I get really tired of hearing people complain about losing all of this equity when really unless they sold the house they hadn’t gained any in the first place.
Option 3 depending on how much of a negative he can stand. Direct benefits: depreciation, home office deduction, appreciation (definitely since we’re near the bottom), some one else is paying the mortgage (not him) and more choices in his future. While it’s more hassle to deal with “Toilets & Tenants” it’s well worth it financially. Selling now is a huge mistake.
Unless Marke is being forced to sell a home for some reason not identified here his best option is to stay put, Option 1.
1) There is a good chance that he will recover at least some “lost” equity over 3-5 years. And he could improve his equity position in the vacation home also.
2) In 3-5 years he can re-evaluate the situation when the options are more than likely better.
3) Assuming–as Carmen has–that the primary home is worth considerably more than $250,000, a reverse mortgage in the future could fund a decent retirement if he wants to stay in the home. This is a big “if” since we know little of Marke’s personal situation including life expectancy.
4) It doesn’t make much financial sense to produce a negative cash-flow position in the house–just sell it now and break even. It is easier than most think to forget the old house, especially if you can stay in the same locale or at least near the things you enjoy.
@Ed Nelson — You said “it doesn’t make financial sense to produce negative cash flow”, when in fact that’s pretty much what this guy has in his house; to the tune of $1700/month. If he can easily move & rent the place out his negative goes from $1700 down to let’s say $300/month, building equity and appreciation for every month he can do that. It’s basically a trade. Time/effort vs. money. If this gentleman can live and work from his cabin, and doesn’t mind T&T, then he should put the renters money in his pocket. You seem to assume he prefers living in this house as opposed to the cabin. In the end, he has to choose how he wants to live his live, and the cost of each choice. If the cabin is livable, and the options are palatable to him alone, then he has to make that judgement call. Financially it’s probably stay for free in the cabin, and rent the house; though he could obviously rent the cabin, and live in the house depending on the rents either way.
A guaranteed net zero or even positive cash flow vs. “maybe” $300/ mo. negative. Draw your own conclusions.
Every scenario has to have some major assumptions with such little personal information.
What if Marke tries to maximize all the rent possible from both the house and the cabin?
He could rent out the cabin to vacationers or a long term tenant. At the same time, assuming he has rooms to spare, he could live with one or two renters in his home.
Although this may not be the most comfortable option, it only has to last until he feels confident about his future financial security.
Her’s my two cents.
Sorry 59 w/no retirement savings, means no retirement for you at 65, maybe 70 check w. SS for exact $ figures, unless you have a pension that wasn’t mentioned.
#1. Stay in Home, I see that you will pay it off in ten years @ 1700. Refinance into a new 30 year mortgage, and put the diffference into your retirement savings.
#2. Sell Home… when it comes to break even i’ll assume that includes all the costs that come with selling your house, and the savings will not be the same $204,000 because of cost with new place to live.
#3 Rent the House This would be the worst choice because of negative cash flow, you have all the headaches of owning the house such as repairs and maint and if you get the wrong renters you would never have any retirement savings.
As others have said, max the rent from the vacation cabin, or sell the cabin. Get a roommate or someone to rent a room, refinance the house, to free up some money from the mortgage. Cut expenses to the bone, check over all your bills and look for the things you can cut, such as cable. Look at your insurance and change your deductable, and shop your needs to different agents/companies.
I’m near retirement and it looks as if I’ll have to keep working unless I decide to become a bag lady, which really isn’t an option because I have too much stuff to fit in an abandoned shopping cart.
Looking at it from my perspective I first have to ask if Marke has a wife or someone else who needs to be part of the equation. If that is yes and everyone is in agreement, I would say 1) Move to the cabin 2) Unload the house. Yes, renting is an option, but there’s more to being a landlord than taking in the rent and paying the mortgage. For me, the grief wouldn’t be worth it. That’s another thing Marke has to decide. 3) Save for retirement. When you’re tired and want to retire, it would be nice not to HAVE to have more than a part-time job. It would be wonderful to have no job at all if that could be arranged. ;p
Personally i feel #3 is what i was going to say too. To add more i strongly consider a tenant to help with the mortgage payments. I think it is a bad idea to sell the home now because we are almost out of this crisis and the price will start to rise again
I definitely would keep the home.
You’d have to look at the cost at renting a similar place – I know here in Vancouver rents are skyrocketing and places are getting hard to find.
Can you rent out a room to a student to make some extra cash?
Why not rent out the cabin when it’s vacant?
First of all, I think Marke needs to look at refinancing his mortgage for the primary residence. I don’t think refi into another 30 year mortgage is the way to go for him, instead he should investigate a refi into a 10-15 year mortgage with a much lower interest rate. Assuming he had his mortgage since the mid 80s, he’s probably paying a higher that current interest rate and the fact that he’s not underwater will make refi a breeze.
I also like ideas about getting a roommate and renting out the cabin.
Any savings from the refi and tenants should be put towards retirement.
Now if Marke does not like to share his home with a roommate, he can look into one a more complicated option. This works for markets with very depressed real estate values, but decent rents (I see this in Phoenix). He can rent out both his primary residence and the cabin and buy a smaller, cheaper home to live in – programs like Fannie Mae’s HomePath allow as little as 3% down payment with no PMI.
In this scenario, he may have some negative cash flow on his primary residence (depending on market rents), positive cash flow on a cabin and much lower cost of housing for himself. If he buys correctly, he may even get net positive cash flow or at least come close to breakeven.
The benefits for him would be:
+ $1700 or so per month that he can divert to savings (he should still see if he can refi the primary residence to lower the payment by paying less interest)
+ any appreciation he gets on the new home that was bought for cheap
+ free or almost free housing which he can extend into his retirement, so that he doesn’t need a large nest egg to cover fixed costs.
Of course this would only work if he has some savings. I know he doesn’t have any retirement savings, so if he doesn’t have any other money, he’d have to cut costs to the bone as Brian (#8) said and probably rent out the cabin in order to save for a down payment. It would be tough in the short term, but can set him up for a much more secure retirement!
There are too many unknowns to make a clear call with this. If I were Marke, I would consider the following:
1) If refinancing is cost-effective, then I’d consider doing that first. You’ll pay a higher rate if you refinance a rental house, so don’t rent it right away.
2) Rent the house to retain options open to keep it, sell it, or do a reverse mortgage. You can’t take advantage of a rebounding economy if you unload the property. Renting it will defray the cost of holding it as an investment. Currently, it will cost more to simply live in it without the help of renters.
The rental idea has drawbacks, but it also has great tax advantages. You can probably find good folks to rent the house that aren’t quite in a position to buy in this tighter market. Take your time to make certain you get the right renters so the hassle factor is minimized.
Consider renting the house fully furnished. It will make furniture and other resources in the house draw a higher rent. These furnishings won’t fit in the cabin and storing them would just be another unnecessary financial burden.
Consider a “corporate rental” type arrangement where a company in the area could make use of a fully furnished place for key employees looking to relocate, visiting executives, off campus meetings, casual conferences and other uses. It gets rented full time by the company regardless of how often the company uses the home.
3) Cabin rental might be great for a while but likely won’t be regular but rather seasonal. Renting out the cabin will also incur cleaning costs and management costs that aren’t going to be cost-effective.
The cabin might be a life boat of sorts since it’s paid for. I wouldn’t sell it if it’s possible to live there while still working. The cabin can be the new residence once renters for the house are found.
4) They say it’s never too late to start saving for retirement, but it’s an illusion to see $200K as a nest egg unless you plan to relocate to a very low cost of living area and live in a shack, cabin or camper.
5) Find a good friend with a soft shoe who is willing to kick you in the rear all the way around the block for living without a financial plan and winding up on the edge of retirement with no savings, limited assets, and high cost obligations to deal with.
I want to be helpful, but really, the first thought that entered my mind was, how could someone reach age 59 and have NO retirement savings?
I would say rent the house and live in the cabin or get a roommate and continue living in the house. Everyone here made good points. Also refinancing.
Marke can keep the house and continue to make payments, as it will be paid off in ten years. We are in a market low and his home should theoretically be worth much more in ten years than it is currently. If he sells his home there may be tax consequences which would further erode his assets. Also, a home is a way of “forcing” someone to save for retirement because it is an asset, plus there are numerous tax advantages to owning a home. If he doesn’t own a home, I highly doubt that each month he will save $1,700 each month on his own. Furthermore, once he reaches age 62 he can apply for a reverse mortgage, which can help his retirement cash flow tremendously, especially since it is tax-free (loans are not taxable)
I’m with Ben @7 – find a way to turn the cash flow positive. Rent out rooms if you can, rent out the cabin too – something to make cash flow from the property positive. If there’s no way to do that, sell the big house & downsize into the cabin if that’s possible.
Where I live, the “rooms for rent” market is just swamped with renters because people are downsizing from apartments or have lost their homes, college kids are choosing not to get apartments for the summer because they can’t find jobs, etc.
Sell the property, move into cabin, buy a cash flow positive apt building (three or fourplex) and let the tenants pay the mortgage of that place down and live on the rest. You can retired today.
Too many unknowns here, to include marital status and spousal income, however, if the cabin is within reasonable commuting distance to work, I suggest selling home and live in cabin. Second step is establish a budget and include a savings plan, as it is obvious your greatest need is to have savings plan. Plan should include meeting retirement goals by 67, not 69 or 70.
Let’s assume Marke was already living in the cabin, which is his only home. He has decided to save for retirement. He finds a house which can be purchased on a 10 year loan for $204,000 plus upkeep. Would he decide to buy it then? Why? To be closer to work? To become a landlord? As an investment because he believes the economy will stabilize or improve w/in 8 yrs? Is there a better investment vehicle with more guarantees and less stress? Quality of life is not in what you own, it’s in peace of mind.