Help a Reader: How to Survive with All Net Worth in a House

Here's an email I recently received from a reader:

To start off, my husband and I purchased our home in 1987 for a little over $100,000......the house itself was little more than a summer cottage and the property was forest right up to the door......my husband was a plumber and I managed construction companies before we made the move up here......we were both Bronx natives and grew up in relative poverty and were the first in either families to buy our own home....we had a building permit to start working on the house right after the closing.....since we were raising 2 teenagers at the time we decided that we would put all of our "extra" money and a whole lot of sweat equity into making this house our retirement fund and, ultimately, our inhieritance to our children.....my parents had always lived very close to us and we had planned to make the house into a mother/daughter and have them move into the downstairs apartment after the "kids' were off on thier own......so we did have a pretty good plan...I think....

We opened our own plumbing business in 1989 and by 1993 were doing very well and were at the point of hiring other employees.....things were finally paying off......Then, at 40, my husband was at a job and he had his first heart attack and triple bypass surgery.....we had to close the business and I opened a business of my own after he was well enough.....We also had made the house into a mother/daughter and my parents retired here into the apartment we made for them downstairs, we split the running costs of the house 50/50....My father had a decent pension and we managed........ unfortunately, we lost him to lung cancer a year later.....

In 2003 we had only 2 years left to the mortgage and the house was worth around $300,000 or more....we never planned on selling....then the house burned down.....fortunately I had really good coverage and the house was rebuilt better than before.......oak floors throughout......bow windows.....arched windows......garden windows.....4 decks.....we had designed it ourselves, not for resale (most likely my biggest mistake) but for what our needs were.....the insurance also paid off what was left of the mortagage so by the time the house was ready in 2004 (the contractor still had about 30,000 in this and that to finish) it was worth well over 550-600.....there is almost 4 acres of property with a Huge portion around the house landscaped and about a 1/4 acre of park like lawn......we all loved it.....

We were only home 6 months or so (and the contractor of course left us without finishing)....when tragedy really struck.....I lost my youngest brother who I had in assisted living and had taken care of for 16 years die suddenly when his aide fed him a half a hot dog....he choked to death.....she didn't know CPR.....it was a shock to all of us.....4 weeks later we lost our Rottie, Natasha...she was also 16 years old......four weeks later we lost my Mom, again, suddenly......and 5 weeks after that....my husband, we said goodnight and 2 seconds later he was gone......

For a year I didn't do anything but grieve......I ended up disabled........I had a small policy on my Mom but just enough to bury her and 100,000 on my husband but went thru 30,000 finishing what the contractor left us with and the rest for living expenses until I started getting SSD....but that wasn't enough to keep the house up..I had no choice but to start renting out the downstairs but I have had very bad luck with tenants and really just broke even......now my latest tenant has left and I have had it.....I can not do this anymore. (.....in case anyone is wondering why I didn't sue the contractor???......he committed suicide in the basement of his home.....his wife is a substitue teacher and they have elementary aged children.....I just couldn't add to her problems.....)

The house is the only asset I have left and the only thing I have to pass down to our children....this was very important to my husband, that we would be able to leave something behind....I'm afraid If I sell now, in this market, I will lose a substantial amount of our only investment......I have another place to live that won't cost me anything but that I won't own......I can manage to live on what I get from disability without the sale of the house....

Soooooo.......my choices, as I see it....are to rent the entire house out, either as a whole or each apartment seperate (there are seperate private entrances) and wait out the market but that is fraught with having to deal with tenants......I could rent with the option to buy which may get a better tenant but also would have to worry about what changes they may make to the house if they 'opt out"........OR I could sell at full price to someone that might not have a easy time getting a mortgage since the banks are making it very hard to qualify, and I could be the "lender".....OR????????..........

I don't know.......I just know I am d-o-n-e......This is the most important decision I need to make and I really am at my wits end thinking of a solution that won't make all that my husband and I sacrificed for let go for a 'bargain basement price" because the market is not great......The best thing I have going is that because the house was custom built & designed it is very unique......the property also has some unusal enticements as it comes with its own caves and a civil War cementary (not close to the house...)....

I don't have it in me anymore to wait out the market and I don't have the physical ability to take care of the property myself......at one point I had rented the apartment downstairs out at "half price" including all utilities in exchange for handyman service......they liked the cheap rent but not doing the work......and I am not cut out to be a landlord....that much I Have learned......

Sorry to make this so long but I wanted to give you as full a picture as i could......Thanks for any advice.....

Then, she emailed me again shorthly thereafter with the following:

Hi again.....I re read what I sent and realized it sounded like I went thru all the insurance money.......I still have a little over 50,000 left and have not touched it since I started getting SSD (2006)......and I am trying very hard not too......I know I may have to spend 5,000 or so to get the house in perfect selling condition and that is making me nuts too.....I own my car so have no car payments....I have no credit card debt, so far.....that's another problem.....if I keep the downstairs empty I know I will incur debt, If i rented it out until I sold it would keep me debt free.....plus.....I am all alone in this huge house and although crime is not a problem, the isolation is......and once you start dipping into your reserve, well, that just leaves me with many sleepless nights......but going through the stress of another wacky tenant doesn't help me sleep well either.....Oh.....I just turned 54......

What would you suggest she do?

Comments

[AdamCO]

It's time to sell the house. If you look at a graph that shows housing prices in a historical context (see here: http://www.cepr.net/graphics/home_sale_prices_v_rents_2006_03.jpg ), you can see that we are way above the trend line.

Prices have come off a bit from the peak, but they chances are they aren't heading up that direction any time soon but instead going back to the historic trend. Therefore, you'll get the most money by selling your house today, tomorrow, or next week.

Betting that the house will appreciate back to what it was worth two years ago is dangerous...by waiting, there is a great likelihood you'll lose even more than if you sell tomorrow. Of course, if want to wait 8-12 years, you might again be able to fetch what the house brought in 2005.

If you can sell the house you purchased for $100,000 20 years ago for $425,000 today, you're looking at a 7.5% annual return on investment, well out pacing inflation. From an investment standpoint, this is quite a good return. It may be that you need more money than this to take care of things, but waiting any longer will probably just make things worse and erode the 7.5% 20-year annual return you have today if you sell at $425,000.

[7million7years]

I am reminded of two stories of my wife's mother (now deceased) and my grandmother (95 and still kicking!):

1. My wife's mother died living on a government pension, no vacations, walked wherever she could, and otherwise penny-pinched to survive. Yet she died and left her three daughters a house worth nearly $800k and no mortgage.

2. My grandmother spends all of her income on supporting my mother and two sisters (all capable of working, but choose not to), and gave my son a check for his birthday ... that bounced!

She just sold a so-called investment property that she had held for 40 or 50 years (clearly, it was so run down that income was very low) for $4.5 Mill!

These are examples of being 'asset rich' and 'cash poor' and describes so many Americans reaching retirement age.

The solution is the 20% rule - have no more than 20% of your net worth tied up in your house (plus another 5% max. tied up in cars, furniture and other possessions) ... that means that you MUST HAVE 75% of your Net Worth in income-producing assets (if you are at or near retirement age) or in a mix of income and growth assets (if you are at least 10 years off retirement).

[Becky@FamilyandFinances]

Wow! This woman has had a tough go of it :(

She definitely needs to sell the house. As AdamCO said, it could take years for housing to rebound. I understand that she wants to honor her husband by getting money back out of their "investment", but living within your means and being able to sleep at night are more important.

I think this is a really good lesson of not putting all of your eggs in one basket. Counting on your home to be your retirement fund or the inheritance you'll leave to your kids is setting yourself up for a situation like this poor woman ended up in.

Good luck, ma'am!

[No Debt Plan]

A tragic story. Unfortunate, but I agree it is time to let go of the house.

[boomie]

Ah, lady....where are your kids? If you are 54 yrs old, your kids should be old enough to be helping you. Forget about leaving them an inheritance. Are you out of your mind? If your kids want to inherit anything, they had better be helping you out. (mine do)

I can only answer your question if it were me, and I am 55+ and can identify with your situation.

If it were me, I would rent out the two apartments and use that money to live off of, as income. I would also incorporate and run the rental property as a business thus giving me a good amount of tax write-offs. You may be tired and pooped, but you are only 54. You are still quite young. Get your sons or son-in-laws to help you, if you have any. If not, have your daughters pitch in.

The rent will give you many, many years of income, if you price it accordingly.

Make sure your $50,000 is secure in either a CD or high interest paying money market account FDIC insured. Only pull out the interest it makes,do not touch the capital nor invest it in the stock market or an annuity.

Make sure you screen your tenants, run credit checks, join a landlord association if you have to. List the apartment with a real estate broker who gets their commission from the tenant. They can run the credit checks for you free.

The rent collected plus your disability, minus day to day expenses should be enough to sustain you throughout your years. If you sell now, in a down market, even if you invested the money-have you seen what the stock market is doing lately????? Hold onto that precious property. Be strong. Have your kids help you. If they don't, sell the house when you turn 65 or so and enjoy your most wonderful retirement. Take a trip to Europe and see the world.

THIS IS YOUR TIME NOW. ENJOY IT!!!!!! never mind about leaving anything to your kids. give me a break!

Make a decision to change your life, start anew and release yourself from your past. Look forward and don't look back.

God bless you.

[Cindy]

Wow. I don't have any advice, but I certainly will be praying for this lady. I've never heard such a painful story.

[Kevin]

1) Forget leaving the house to your kids, you need to worry about your existence and making a life for yourself. They will understand. And like someone else said, maybe if you ask they will help you out now.

2) I assume the upkeep, taxes and other expenses are not feasible on your SSD? The mortgage is paid off I'm guessing, so do you really need to sell?

3) What about a full time job in addition to your benefits? Maybe those 2 together will be enough to keep the home.

4) If it's too painful to live there, it might be best to sell it. Don't think about it as a gain or loss, just try to remember all the good times you've had there. In the end, it's just a house, but you'll have those thoughts and memories for life.

Good luck to you, that sure is a tough few years you've been through.

[Meg]

Not only do you have somewhere to live "for free" but there's no mortgage on the house. I would seriously consider renting it out. I'd make it into a duplex to get 2 different paying tenants in there (so if one doesn't pay one month, maybe the other one will).

Even if you happen to have more bad luck with tenants, it sounds like you could pretty easily survive since you really only need the rent to cover maintenance, taxes, and insurance. Surely you can at LEAST break even.

With any excess I'd be building a portfolio of mostly bonds (a hedge to real estate values), some dividend paying value stocks, and 6 months worth of cash.

And don't be afraid to ask for help/advice. You sound like you're wrestling with this all on your own. Involve your kids in your decisions, and reach out to your church, your friends, whomever. Don't isolate yourself!

[Jake]

Your husband wanted to be able to leave the house behind after his death for members of his immediate family who might need the help. Sounds like you qualify.

Speaking as a husband who is early in his marriage and life and planning on making financial sacrifices much like you and your husband have made, if I had passed on and my wife were in your situation, I would want her to thoughtfully sell the house if that's what makes the most sense financially and practically speaking. I would most certainly NOT want my wife to feel hamstrung by what I told her about my life plans when I was healthy and not expecting this crisis. Think about what your husband or your father would want you to do if they could advise you in this specific situation. I say "or your father" because I think they would both want you to do the same thing -- what ever will give you the best future for the rest of your life.

Good luck.

[DCS]

With a paid-off mortgage, she really doesn't need to be a landlord to rent it out. A house of that value should return enough in rent (I would think at least) to pay a property manager to manage tenants and maintenance, cover upkeep costs costs, and still return a fair amount. Of course she would still have to find and pay for a place to live which in an expensive area (assuming she wanted to buy and not rent herself) could take more cash than she has. However, that would allow enough time to wait for a market rebound if she wants to sell eventually, provide an income if she decides not to sell, and even allow her to pass it along to the kids upon her death, which has some tax advantages I don't fully understand but apparently can be quite substantial.

I see nothing wrong with selling, and I'm sure her husband would not want her to keep the place if it's a burden, but it is worth exploring possibilities that don't involve a sale that might have financial (in addition to sentimental) value.

She just needs to be as careful selecting a management company as she would selecting tenants - someone with a long history, who can show her properties they've had in their portfolio for a long time (to judge how they maintain them) and has good references. Get a good one and she should not have to worry about "tenant stuff" ever again.

[derffie]

look into a reverse mortgage... gives you money now.. lets you stay in your house.. and you can pass on whats left of the house's value to your heirs...

but if it was me... I'd sell the house and buy a maintenance free condo in some beautiful bit of paradise and enjoy the next 30 years of your life.. you deserve it.

[craig]

Agreed! Get a property management company in there immediately to take a look and get references! They will do a good job in managing it for you and you will keep it as a source of income renting out 2 apartments instead of selling. This is especially true if you have 100% paid of the mortgage. Why sell when it has been a good investment over the years, somebody mentioned 7.5% a year? I think over the next 10+ years it will be similar but maybe in the short-term not as good. However it is an asset that can make money for you, but right now you are not maximizing the value in it.

[2million]

Just a thought....couldn't you rent the house to your kids? If the intent is for the house to be left to the kids anyway can't she let them use it immediately (all or 1 part) to help maintain cash flow?

[Anitra]

She says she's not cut out to be a landlord - if her kids can't or won't help her out, she should definitely sell the house, as soon as possible. She can buy herself a little condo and invest the rest of the money to supplement her SSD.

[Suze]

The woman pretty clear stated she didn't want to do the work of being a landlord any more. I don't blame her. She's been through a lot and --- having been there -- I can heartily agree that being a landlord is a lot of work.

I think she has a couple of options. She can investigate property management companies and have them take care of the administrative aspects of renting out half the house while she lives in the other half. She would still have some landlord duties, though, particularly with regard to repairs. That may be an issue.

My preferred choice is to sell the house and invest the proceeds in investments as risky as she is able to tolerate. I would buy a small condo or site condo -- something new and clean with minimal upkeep -- and try to live out her years with some enjoyment and peace.

There will be something to leave the kids, but her first priority must be herself at this point.

She deserves it.

[SpecialKny]

Hi All....thanks for taking the time out to give me your advice...Just to clarify...

First...I already have a place to live (rent free) other than my home so I don't need to purchase another residence..

My daughter & son in law have their own home and the way my house is set up it would not accommodate them and my granddaughter plus they love the community they live in...I live in a very rural area and although I love the seculsion, they don't....my son in law IS helping me as much as he can but he can't devote all of his time to me...my son is still "finding" himself....he will "find himself" much the poorer for not helping me when my will is read...

A trip to Europe is not on my wish list(but thanks for the thought! )and although 54 IS young, thats only true If your well...I am disabled so I am "retired" and I am Not able to take a full time (or part time) job (although I would love too, I have worked since I was 11 and miss it dearly)....I do take a trip once a year in the winter to visit friends I have all over the country and always have at least 2 free tickets available to me to fly (I put all purchases and bills on a credit card to get the tickets and Usually pay the bill in Full every month)...my greatest Joy and interest in life is the time I get to spend with my daughter and granddaughter (I get my granddaughter once a week for a sleepover)

I get a tax break thru a federal program for the disabled and currently only pay 50% for both property & school taxes...If I don't live here I would have to pay the Full taxes....

The house is already divided into 2 seperate apartments but does Not have seperate heat, electric, cable bills....it does have a seperate phone bill..

We didn't have much choice of putting all of our eggs in one basket....it was either put our money into a house OR rent for the rest of our lives and then I wouldn't have any assets...my husband was only 40 when he became disabled, had that Not happened we would have had money invested in other things. I don't think we were unwise, we just got cut short by life....

My house is barely 4 years old and I know I won't get what I could have a few years ago and plan on asking just under 500K for it instead of 575K I Could have made a few years ago....I won't sell If I have to lose another 75,000 (if I was offered 425K).....although I paid 100K in 1989, I paid 280,000 in 2004 to have it rebuilt and that doesn't include the value of the land alone which is 175K ....I think with all the Baby Boomers out there I may have a better shot then most getting a decent price, many of us have elderly parents to care for as I did, so it already being 2 apartments may have a slight advantage.....I hope so..

If the house doesn't sell by September I think that getting a property manager may be just the thing for me....I never thought of that....I would Much rather pay someone than have the headaches of doing it on my own, especially since I'm not good at it....I live very simply and my biggest luxury is getting a manicure, which I could give up If I had to but its not a Big investment....I get 1200 a month for the downstairs apartment when its rented and that is the smaller apartment....I think I could get 1800 or better for the upstairs...so I guess when you look at it that way 3000 a month (less the cost of the property manager) is not too shabby a monthly return....Of course I would invest that income for the future and only use the interest If I need to....and I would still own the property....the more I think about that the better I like it....and as someone said....my Father and my Husband would have wanted me to do whatever made me happy....it would make me happy not to live here anymore but it would also make me happy to still own the house If selling doesn't work out...

Thanks again to you all for the great advice....now at least I have a Plan A (try to sell at a decent price) and a Plan B (get a property manager and still retain the property), hopefully that will suffice....I appreciate you taking the time to post a reply and am also Very grateful for the prayers and kind thoughts....

K~

[Rich Guy]

SELL THIS HOUSE NOW! You will look back in a few years as this being one of the best decisions you could make. It's the safest choice for you right now and solves all problems except for that part about leaving behind something for the kids. Trust me, my father long passed away and I'd give back ALL my inheritance just to have him here on Earth another year . YOUR KIDS DON'T WANT YOUR HOME OR MONEY AS MUCH AS THEY WANT YOU ALIVE AS LONG AS POSSIBLE.

You've worried enough over landlord issues, cash cushions, etc. SELL THIS HOUSE NOW!

[SpecialKny]

I am taking ALL of the advice....I am going to put the house on the market by May...I will keep it on the market until September (of course thats If it doesn't sell...fingers crossed)...I already made the decision, albiet a painful one, to lower the asking price to 500K but thats the lowest I will go, as I said, not only have I already paid off one mortgage on the house But I have also rebuilt it which cost almost 300K...you can only imagine how beautiful the "new' house is with that amount spent...anyone that has seen the house (potential renters etc.) falls in love with it...it was designed with a lot of thought and love and it shows....

If it doesn't sell by September Then I will turn it over to a property manager
and rent it out but still keep trying to sell....But....I did have another thought that I would like to run by all of you...

When a reader asked about places to stay and things to do on a planned trip to NYC a lot of readers replied about renting a apartment to stay in...I had already planned to "stage" the vacant apartment downstairs...I have a lot of lovely antiques and other extra furniture so i won't have to spend a dime to do this....Soooooooo heres my thought....

***Should I rent the apartment out as a weekend retreat?????****.....My thinking is that since the apartment would already be "staged' and, most importantly, since this would only be short term rental, I wouldn't have the typical tenant problems....Also I would have the funds to finish the house and to maintain the property without going into my reserve...

Although I would Love to keep it empty and I have to be practical too....

What are your thoughts on this....????????

Thanks in advance.....

K~

[SpecialKny]

Rich Guy....I would live in a cardboard box If I could have my husband back for just one DAY!!....your only half right about my kids though...only one of them just cares about me and not what is potentially left behind, the other one is Much more concerned over what will be left to him, of course he doesn't lift a finger to help and has tried to get me to use the equity in my house so that he can buy an investment property....without success...

I already have changed my will....my daughter and granddaughter will be getting 85% of my estate....I would leave my son nothing but felt that he would just make my daughters life miserable PLUS he is my son, but he will just be getting the leftover 15% not at all what he expects I'm sure.....

K~

[7million7years]

Just as a follow-up, if you DO decide/manage to sell: immediately lock up the money in a 'safe retirement drawdown strategy':

1. If you are NOT worried about inflation, have a 30 years outlook, you could consider the Grangaard Strategy (google that).

2. If you ARE worried about inflation, read "Worry Free Investing" by Zvi Bodie (he recommends using special Inflation-Protected US Treasury Bonds called TIPS ... ultra-safe).

IF you do sell, the last thing that you want is to lose that money by unsafe investments ... especially not after all you've gone through!

Won't make you $7 mill. in 7 years, but will keep you as 'worry free' as your house value allows.

AJC.

[SpecialKny]

Hi AJC....well, fortunately, I don't care If I make 7 million dollars...money just isn't that important to my life...What IS important is that I make sure that my daughter and granddaughter will have a cushion to sustain them after I am gone, well, even Before I am gone....I was just about to start a 529??...for my granddaughters education when I lost my tenant....that will be put on the back burner until I either sell this house OR it is once again producing income...hopefully this will just be a temporary set back and I will be able to get back on track before too long...I have been buying bonds for my granddaughter since she was born 5 years ago, so right now she has almost 10,000 just in bonds from me, her other grandmother has also purchased her bonds whenever I have and I think she has just about matched what I have bought...and she has other great grandparents and relatives that have also sent some so all total, right now, there is most likely around 30,000 put aside for her....between that and when I can start the "real" education fund (sometime within the next 3-6 months) she should be OK...???

She will also get 35% of my estate but can only access that before shes 30 If she wants to purchase a home, otherwise it stays put....

Once my house looks like it is going to sell you can be sure that I will be asking for more advice on exactly what I should do with the proceeds....I will buy the book you suggested so I am more informed when the time comes....and Yessssssss....I agree...I don't think I could survive losing all I have struggled so hard to keep for my family....

Thanks for the concern....it means a lot....(-:

K~

[Rich Guy]

I sure hope you get a fair price for your place, and get a sale by the end of Summer.

My sister has a second home which she enjoys regularly, but also rents it out as a "weekend retreat". She is selective about whom she rents to, and that has made the renting easy on her. Sure, she could make more by being less selective, but it's more important to her to not have problems as a landlord. Sometimes that means the house sits empty.