Christine Dugas, Money Watch columnist via USA Today
Money Watch, a personal finance column that runs every Saturday, features a financial planner from the National Association of Personal Financial Advisors answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: email@example.com.
Q: My mom, a 64-year-old widow, lives on a fixed income and has a 60-year-old house that needs about $10,000 to $15,000 in repairs. She would like to live with me and use the house as rental property. But would it be better for her to sell the house now and not pour much of her money into the mortgage, utilities and repair? Or, would it be better for her to rent the home now and sell it in several years after the housing market rebounds, since the home value is 28% less than what she owes the mortgage company?
A: You sound like a very supportive son, as you open your home to your mother and help her make a good decision about what to do with her house.
Have you asked your mother why she wants to rent that residence? If it's mainly because she hopes to sell it in the future for more money, she may not be including other important factors. As a rental property owner, she would have several extra expenses that may include:
• Repairs that you mentioned, which may be $15,000.
• Cosmetic updates will probably be needed to make the house attractive for a renter, including new paint and carpets. This updating typically is done after every rental moves. (And what happens if a renter trashes the house?)
• Mortgage payments will continue, as a cash drain.
• Cost to hire a property manager to find regular tenants and deal with handyman tasks. Usually this is about 10% of the monthly rent. (If she's counting on you to do this, that's something that should be clarified now.) Typically rental property doesn't rent 100% of the time, but certain rental expenses will continue every month.
• Legal expenses to prepare rental agreements and possible other costs, such as a tenant being evicted.
• Ongoing costs to care for and maintain the property, plus periodic cleaning between renters.
• Renters insurance probably is more expensive than your mom's current homeowners insurance.
• Tax implications are also important. Although the rental home will bring certain tax deductions, the rental income will be taxable. Also, if she converts the house from personal to investment property, she may face capital gains taxes in the future, if the housing market rebounds prior to sale.
Conversely, if your mom sells the property now, she will have to put some money into the house to get it ready for sale. She will also have to pay off that 28% difference in the mortgage amount and the house's value. This may be troublesome for her, as she views this as "money down the drain."
However, after her house sells, she will have no cash-flow drain on her fixed income going forward. There will also be no sleepless nights worrying about issues that often bother inexperienced landlords. That's a priceless value!
Your mother may also have an emotional attachment to her house, which makes her sad to think about selling it. Significant memories and experiences may reside in that home, making it hard to permanently cut the ties. Sometimes our emotions about money carry more weight than our rational decisions. Talking about these feelings can help us understand our decisions. Yes, it can really be more than just adding up the numbers to make a money decision.
Thanks for being a good "thinking partner" for your widowed mom. She's fortunate that you're there for her.
Kathleen Rehl, NAPFA-Registered Financial Advisor