Can I get your (financial) opinion?

[mila]

PDQ, will DD later b/c of personal details.

BF and I have plans to get engaged/married within the next year. We both make good incomes ($130k+ each in LCOL environment), have stable jobs, and have no plans to have kids. I am on track for retiring comfortably. BF currently puts a small % of his income into 401k.

BF owns Home #1 where he used to live (west coast) before coming to the midwest for a job promotion. Instead of selling his home, he rents out his home via property management, and has had same renters there the entire time since his move. BF bought Home #1 for $267k (it is now worth $467k- edited). His renters pay for the majority of the mortgage, but BF does pay for $600/mo. Purchased in 2007, house will be paid off in Yr 2037 (59yo), and then it'll be an income stream for us.

When BF moved, he purchased Home #2 (current home) in 2014 for $195k, putting 20% ($39k) down. (Currently worth about $230k.) He only did a 20yr mortgage, so it will be paid off by Yr 2034 (56yo). Very friendly and nice neighborhood, good part of town, solid school system, and established neighborhood (lots of trees and greens), and very quiet and safe.

ETA- BF doesn't put a lot into 401k knowing he will eventually use Home #1 as a "retirement plan" by selling it.


This home is just fine for 2 people- roughly 2,300 sq ft. We have both talked about buying a home together- something a little nicer and bigger, but this isn't going to happen for another 3-4 years. Since we will be here for several more years, we've been making improvements on it (replacing fixtures, all new nice appliances which will stay, painting all rooms, new tiling, new carpeting, adding crown molding, etc), and the house is shaping up nicely. 

What really needs updating is the kitchen. The space is actually very large, but the cabinets are crappy, the backsplash is ok, and it just looks outdated. Also, our current master bath is fairly large but needs a "facelift" (everything works and it is nice, but we only have 2 outlets and need more cabinetry space.

Question: Knowing this info, would you:
a) Update the kitchen and master bath and stay in the house (having 2 houses completely paid off by 60yo is very appealing)
b) Look for a nicer/bigger home

If you've read this far, thank you!

Edited to add add'l details...

[konapoppy]

Unrelated to your question, why is he keeping the west coast home when he could sell it for a huge profit, particularly when it is costing him money each month? Do you have any plans to move back to it? Other investments would give you a better return, especially when combined with the gain he will have on the sale (there are tax implications though).

[daisyn]

Depends
How much would a nicer/bigger home cost? Where would it be and which area do you like better?
How big of a deal would it be to move (I seriously never want to move again because of the stress). Then again a kitchen and bath renovation sounds stressful too.

I'd probably vote for a new place because you could pick it out together and make it more both of yours. Plus I wouldn't want to deal with renovations. But I wouldn't buy property together unless you are married because from a legal perspective if you split up it could be messy.

[jwright]

Is he getting market rate rent for the west coast house? that seems like a lot to bring to the table each month.

My answer to your questions would depend on the cost of the remodel versus the new house. With two incomes to pay on a new house, could you swing a shorter term (or pay ahead) and still have a new home paid off early?

[mila]

konapoppy- That is a good question, I will need to ask him that. Not sure if he is hoping/thinking that it will continue to increase in value? But we have no plans to move into Home #1

daisyn- Yes, that was exactly our thought. Find a home we both love together. We are both comfortable in this home, and it is a nice home in a nice neighborhood. And we both have said- once we move, that is the last time we'll do it. The stress!
And again, we aren't planning on buying a home together (if we do) until we are married.
The dilemma is- the kitchen needs updating (we can paint it white, add new tile) and it will look better, but still not functioning to where I want it to be. Thus, do we just "live with it" for a few more years or get it renovated now (knowing we may sell it in 5 years).

jwright- Not sure if he is getting market rate rent. He hasn't raised the rent at all since he moved (and it's been 7 years since he left), but he also mentioned that he doesn't mind paying $600/mo since it's a tax shelter. I'm assuming a kitchen remodel will be $10-$15k (no new appliances and faucet needed since all has been replaced)- for new counter, new sink, new backsplash and cabinets.

[daisyn]

I would live with the kitchen now and buy a new house in a year. I wouldn't wait another 5 years, no way. With your salaries you should be able to afford it I would imagine and the sooner you buy the new house the sooner it will be paid off

[mila]

Jun 25, 2017 8:37:41 GMT -5 daisyn said:

I would live with the kitchen now and buy a new house in a year. I wouldn't wait another 5 years, no way. With your salaries you should be able to afford it I would imagine and the sooner you buy the new house the sooner it will be paid off

While I agree with this, I do not want to buy a home together without being married. That part I won't budge.

[ellipses84]

How will renovating the kitchen impact resale value? It may be worth it to do a renovation now, if it's just cabinets and tile, then live in it a while longer until you need a bigger place. The bathroom seems minimal too. You could have outlets added when you do the kitchen, and add a furniture storage piece instead of built-ins if you want. I would keep it a small update not a dream renovation, if you want to sell. Otherwise, I'd live with it and wait until after you are married to find a new place. Why do you feel like you need a larger place? I'm in a house smaller than that with 5 people and I really dislike the layout but the SF is adequate.

Def. check on market rate for house #1. I wouldn't do a drastic rent increase if you want to keep your good renters, but you may want to consider incrementally raising it. Is it going to require any major maintenance or renovation soon?

[minzy]

I might check with a realtor (or at least start tracking the local market yourselves for awhile) where you are to see if you'd really be likely to get the return you want with an updated kitchen. If it's going to make the house significantly different from nearby comps in the neighborhood, you might not really see the return from it, so it might not be worth it (financially, anyway) to update.

[lolo]

I agree that meeting with an area realtor would be my first step. I'd want to know ROI.

Actually, I would probably have two conversations. I would get estimates from 2-3 reputable kitchen companies. Pick the desired plan and confirm it with realtor in your second conversation.

[Deleted]

mila, these are fascinating questions. Based on what you posted, and with my general bias towards simplicity in finances and away from real estate, here's what I suggest. Regardless, it would be interesting to keep us updated, so please do!!

- Encourage BF to consider selling the house that costs him $600 / month; yeah, it would become an income stream in the future, but $600 / month and the other costs associated with home ownership (& property management) would also be powerful if invested in the market steadily over the next *20* years! Its BF's decision, obviously, but if he were my partner, I'd be sick at the idea of paying off a home that may continue to appreciate, that may continue to have good renters, that may need a new roof / water heater / windows / whatever.....Again, I am biased away from real estate (I think it is a tempting investment that rarely beats the market for *most*.) Real estate is illiquid wealth, which I don't like.

- I'd limit any additional investment in your current home, and put money towards your new place. A real estate agent is going to be a great person to speak with, but of course your current home would sell better if the kitchen was updated - so, when you sell, why don't you have the RE promote that you'll give a $10k discount off list to contribute to the kitchen fund? Then, new owner gets what *they* want, not what you picked 4-5 years ago.

- It sounds like you want a new place; if you were determined this was your forever home, I might give a different suggestion. Since you'd like to get a place together, start saving for that now vs. working on tons of home improvement efforts. There are high-ROI projects that you can do yourself (crown molding is an excellent example - its super cheap to DIY and looks GREAT) - but beyond that, I'd put the money towards future vs. today.

- Get a prenup. Since you have an aversion to buying together before you're married, this may already be on your to-do list. I have been working on a blog post about the importance of prenups / postnups that will go live eventually, but it is something I believe ***every*** couple needs to have in place. Of, if they live together & not married, a co-habitation agreement. (You weren't asking about this topic, I realize; please know this advice comes from a good place!!)

Keep us posted!!!

[goldengirlz]

I agree with everyone else that paying $600 month on house 1 is a bad investment.

As far as renovate vs. sell, my bias is usually renovate. Not only is moving expensive, but all houses eventually need something. An "updated" house is only updated until trends change. You'll also pay a greater premium for someone else's work than doing it yourself.

That said, I'd need to know more about your future plans regarding kids and your current neighborhood vs. where you would move. I think 2300 sq ft is plenty big for a family (of course, this is coming from someone who has spent most of her life in NY and CA and I'm well aware that perceptions in the middle of the country are different). But are you in the school district you want to be in? Is your neighborhood good for families? Those are the reasons I'd consider moving.

[farfalla2011]

I know you don't necessarily have any say in the situation, but I would sell the west coast investment home and pay cash - or close to it - for an investment home in your local area to have that positive cash flow now rather than in 20 years. Not only would you have cash flow from rent, you'd also free up $600 a month to increase cash flow even more. I know you could argue that the rent on the west coast property would have more rental return, but, you're not even going to get positive cash flow giving the current situation. Plus, he's had the house for 10 years, you are going to start having repairs that will need to be done which will give even more negative cash flow than just the $600/month.

Then, I would save up for a down payment on a new home and not do any updates to your current home. Then after you get married purchase your new home with your saved down payment and equity from the sale of your current home. I'd also look at doing a shorter loan term so you can still achieve paid off mortgages in your 50s, or even late 40s.

I know you mentioned him enjoying the tax shelter with the loss on the investment property, but personally, I would prefer to position myself for financial independence away from my 8-5 job instead of having an asset that is costing me a fairly significant amount of money.

[mila]

UPDATE: I did have a more candid conversation with BF over brunch about why he feels that Home #1 is "part of his retirement".

Home #1's mortgage payment (with property management fee) is $1,800/mo. Renters are paying $1,200/mo, and BF is taking on the remaining $600/mo. He decided to keep the $267k property b/c since he's bought the house in 2007 and now (10 years later), it actually is valued at $467k (not $400k that I quoted earlier). He said he could have put that $600/mo towards retirement, but the financial gain on the house was larger.

What I also didn't know is that he is using the sale of that home (but not the income source that it will eventually become) as part of his retirement nest.

ETA- Good location, solid school system

[dr.girlfriend]

I have to say I got a little stuck on 2300 sq feet not being enough for two people. I could understand if you said the layout or location wasn't great, or something else, but that seems a lot of space for two people. I hope this doesn't sound judgey but I really am curious -- what would you use the extra space for? Do you find yourselves needing office space or an extra guest room or something specific?

That said, you certainly make enough that you could probably mansion it up in your LCOL area. :-) I think the renovations you are talking about to your kitchen seem pretty low cost -- it sounds like you've already upgraded your appliances, so it would just be cabinets and countertops. I think you'd probably come close to getting your money back from that on sale of a house with an updated kitchen.

I agree that selling the West Coast property makes sense to me, although since it is largely your BF's concern I would not kick if he were opposed to it. I can see how it would be tempting to hope it doubles in value again, as unlikely as I think that is, but then again I'm not a West Coaster.

[mila]

@dr.girlfriend- not feeling judged at all! To answer your question, this house is a 4BR home, but it is a split level. Thus, no basement and BF WFH as well. 2 rooms are already taken (our master and his office). We have a spare bedroom (completely revamped- new paint, new furniture, new carpet, new blinds, etc), and the other room is used for storage (this room also got newly painted and new carpeting).

Location is great- not far from highway, a more established neighborhood (lots of trees and greenery), and great family-friendly environment. Solid school system, and very quiet and safe. 

We happened to be @ Home Depot today (seems to be an every weekend trip lately...) and looked at the Kraftmaid Cabinetry. For a 10x10 kitchen, the cabinets+granite countertop+island was $8k. WE would need to do- cabinets, backsplash, and countertops.

As for the value of Home #1, I also doubt that it would double again, but the area has become incredibly popular (hence the cost of the home), and he figures it will continue (or at least maintain) when the light rail is there 3 blocks from the house (which is currently being worked on). The area is also landlocked, so it isn't as though more houses would be popping up.

[wildrice]

Since you said you have no plans to have kids, I'd renovate. You don't need more than 2300 square feet. Of course if you WANT it, you have the income to support it... but personally I'd use the money you'd spend on a more expensive place and invest it toward retirement, especially since your BF isn't saving a big percentage of his income right now. I admit I do not know a ton about real estate investment, but I'd worry about it maintaining that high value over a long period, especially since it went up so quickly - it could drop value just as quickly.

H and I live in a 1300 square foot house and I think we could easily downsize a bit and be fine. I guess there is no harm in getting a bigger house if that's what you want - I just would encourage you to really think about WHY it's worth it and making sure that it's actually what you really need/want.

[Deleted]

I agree with PP's. Why do you need a bigger home? I'd rather have a more diverse portfolio then a very large house.

[krystee]

If the home is worth $467K, he could probably DOUBLE the rent he is charging. Why isn't he raising it?

[nicechicken]

1.) raise the rent on house 1 or sell and invest.
2.) do not do any remodeling projects. Mostly because of my experience with my bathroom. Never. Again.

[konapoppy]

Jun 25, 2017 14:58:14 GMT -5 mila said:

UPDATE: I did have a more candid conversation with BF over brunch about why he feels that Home #1 is "part of his retirement".

Home #1's mortgage payment (with property management fee) is $1,800/mo. Renters are paying $1,200/mo, and BF is taking on the remaining $600/mo. He decided to keep the $267k property b/c since he's bought the house in 2007 and now (10 years later), it actually is valued at $467k (not $400k that I quoted earlier). He said he could have put that $600/mo towards retirement, but the financial gain on the house was larger.

What I also didn't know is that he is using the sale of that home (but not the income source that it will eventually become) as part of his retirement nest.

ETA- Good location, solid school system

Is he anywhere near market rate with the current rent? I can't imagine he is.

[raangoli]

I don't understand why he is taking on the extra $600 a month for house 1. Just because he can, doesn't mean that he should. That's $7200 a year out of his pocket that he could be investing and getting decent returns on until he is ready to retire.

[steamboat185]

Sell the rental. A few calculators show what he would have earned had he invested in the S&P and assuming 20% down on the house plus the 600 a month he is dumping in and he would have roughly 241k. 241k that he could access tomorrow if needed (or just stop investing occasionally). With the house he has a constant 600 a month bill and the house has to be sold before he can get the money out. I don't think the house is as good of an investment as he thinks it is.
dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/
Edit and as for the tax shelter if he isn't maxing out his 401k he is missing on sheltering all of his money from taxes.

[jwright]

There's a rule of thumb about rental rates - the 1% rule. You should be able to get 1% of the price of the home per month is rental income. That would be $2,600 for the rental house. The rule doesn't always fit (especially in high cost of living areas), but you guys are WAY off.

I echo others that the home is a bad investment.

[thatgirl2478]

Everyone has made very solid points on the whole west coast house. I would reconsider that 'investment' as well. Remember 2008/2009 when the housing market crashed and houses that were previously 'worth' a lot, ended up losing half or more of their value?? While the same thing could happen with a 401k or IRA, you would probably be able to recover that value faster than property. I know people who's homes STILL aren't back to their 2007 values (in desirable Chicago suburbs). Additionally his only 'retirement investment' relies on other people to a) want to rent and b) pay their rent. I have been a landlord and IF you have a good tenant it isn't awful but that's a BIG IF. I wouldn't want my retirement to ride on someone else paying rent (and not destroying the house to the point where I have to remodel everything).

That said, I don't know your relationship, but I know that *I* wouldn't feel comfortable investing large sums of money into a house that I didn't have a secured legal entitlement in. That includes renovations AND purchasing a new one together while unmarried (yes you'd have more legal protection in purchasing together, but it's a hairy situation).

[Roc A Bee]

If he is adamant on keeping the rental, I'd at least raise the rent to cover the mortgage. What happens when the house has a major repair? You aren't able to save anything extra from the renters bc they aren't even covering the mortgage!

[sillygoosegirl]

A home worth $467K should rent for at least $2000 if not $3000/month. He should either be raising the rent or selling. (I would lean towards selling, as I think things are kinda bubbly on the west coast right now...)

As for update vs move, I'd decide based on how much you love the things about the house you can't change: location, layout, etc.

[MixedBerryJam]

Jun 25, 2017 10:56:03 GMT -5 @feministfinancier said:

mila , these are fascinating questions. Based on what you posted, and with my general bias towards simplicity in finances and away from real estate, here's what I suggest. Regardless, it would be interesting to keep us updated, so please do!!

- Encourage BF to consider selling the house that costs him $600 / month; yeah, it would become an income stream in the future, but $600 / month and the other costs associated with home ownership (& property management) would also be powerful if invested in the market steadily over the next *20* years! Its BF's decision, obviously, but if he were my partner, I'd be sick at the idea of paying off a home that may continue to appreciate, that may continue to have good renters, that may need a new roof / water heater / windows / whatever.....Again, I am biased away from real estate (I think it is a tempting investment that rarely beats the market for *most*.) Real estate is illiquid wealth, which I don't like.

....

Keep us posted!!!

I agree with everything ff wrote except the bolded. It's not may, it's will. I speak from experience when I say even with a property manager, dealing with a rental long distance (even with excellent tenants - I could not have wished for more excellent tenants than I had the four-plus years we did this) disasters will happen. And you may move home to find your neighbor put a fence in your driveway! We held onto our house because we knew we were returning; if he's not going to live there I'd want more than "it's a tax shelter" for a justification. What would he make if he took that $600/month (SIX HUNDRED DOLLARS! A MONTH! FOR TWENTY YEARS!) and invested it?

[aurora]

Since you're not in a rush, it doesn't seem that it would hurt to talk to a realtor and see both what you could get for your house and what you could get if you were buying.

That said, even though a renovation would be annoying, if I liked my neighborhood otherwise and I were just doing cosmetic changes (as opposed to moving walls), I'd probably pick the kitchen and bathroom renovation over the move.

H and I live in 1500 sq ft and it feels, if anything, too big for 2 of us, so I can't imagine thinking 2300 sq ft is too small. Maybe not the right layout, sure, but definitely not too small.

[mrs.jacinthe]

As a realtor in an area where home prices have appreciated similarly to what you're saying (please feel free to PM me if you want to discuss in more detail), that house is so far under market rent it's almost comical. Your renters are staying because they have a great thing going and they know it.

I'll give you an example. In this area, right now, people are paying $1200-1500/month for rent on a 2 bed 2 bath *condo*. When we moved out here in 2011, we were paying $1600/month on a 3/2 SFR that was only ~900 square feet, and that was at the bottom of the housing crash. Without knowing details on location, lot size, whether you accept pets or are 420 friendly, and square footage, my best guess on a 3/2 home at around 1600 square feet is that they should be paying *at least* $1800-$2000 a month. His continuing to keep rent low and paying $600/month on the mortgage is incomprehensible. Personally, I'd recommend selling it and using that money to either a) pay off your current home so you don't have a mortgage and can bank your current payment or b) buy an investment property somewhere you want to vacation or already do vacation regularly and use it as an AirBNB or HomeAway when you're not staying there. However, if he decides he wants to keep it, he needs to have a come-to-Jesus with the property manager, as they should have advised him to raise rents along the way to keep up with market value and really did him a disservice not to have done so. He then needs to start raising rent gradually in order to come up to market value or get rid of his current tenants, do a property clean-up and reset, and then get new tenants at a more appropriate rate.