Author Topic: Should we add a bedroom to our house now for retirement income in the future?  (Read 3878 times)

Integ139

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I have a retirement planning question that I would like other people to give feedbacks on.

We are a family of 4 (a father 56 yrs; a mother 52 yrs; first daughter 22 yrs; and second daughter almost 11 yrs).  We live in a house in San Francisco Bay Area, with a mortgage which will be paid off in about 3 years.  We do preschool/daycare business in our house as the only source of income.  The first daughter graduated from college last May, and is back at home, doing a part-time job.   I have done some financial analysis on our finance, and I donít think we have enough savings for us to retire in our area.  Our income from our business fluctuates from month to month, and it is low for our area.  Although we have been thrifty, we have not been able to save for our retirement for the past 11 years, and I donít think we can make enough savings for the next 10 years or so (until our normal retirement age), which are significant enough to change our retirement situation.   I had been in finance/accounting field and got laid off 11 years ago; and my wife had been a home maker until that time.  I looked for a new job, but could not land any for a year, so we decided to open a family daycare after much consideration.  We have been doing this family business since then.

About 3 years ago, I received a lump sum gift money for a little over one hundred thousand dollars from my father who wanted me to use that money to grow our business so that we can help ourselves.  To grow our business, I looked for a rental property suitable for preschool in our area for 2 years, but I came to a conclusion that it is almost impossible since this urban area is already very much developed and crowded.   So, I abandoned that idea. 

My wife and I have been trying to find a good strategy to secure better retirement by utilizing this fund in another way.

Through my financial analysis, I realize that putting this money into our IRA or other financial products wouldnít yield significant and secure enough returns at our retirement that would change our retirement situation.

We also considered using the money to purchase a single family home/duplex/triplex in an area with lower cost of living and renting it out.  At a certain point in time, we would sell our house in San Francisco Bay Area, and move into this rental property.  The proceeds from the sale of our house would be used for our retirement.  However, there are many issues with this option.   First, it is very difficult to find an ideal area for the rental property (i.e. retirement place) with the amount of the money.  Second, even if we could find one, it would likely be far away from our Bay Area house and the rental income would be very small.  The distance would necessitate hiring a property management company, which would further reduce return, and along with other costs, the rental income would be at a point where it would not be worthwhile.  Third, the timing of this transition is complicated and risky to our financial situation.  We would not want to sell our Bay Area house after our second daughter finishes college because she would not qualify for much financial aids since we would have a rental property.  The rental income would be small, and we would somehow have to come up with funds from our monthly cash flow to pay for her college education.  We would not want to sell our house during her college years, because up until the house sale, we would be in the situation described above; and after the house sale, we would have to use the proceeds from the house sale to pay for her college expenses and that would reduce the proceeds for our retirement.  So, we might want to sell our house before our daughter goes to college, and put all the proceeds from the sale into our retirement accounts so that she would get full financial aids.  However, this would mean relocating our daughter before she finishes high school.  It may have negative impact on our daughterís emotional state, which may have negative effects on her grades, and above all I donít want to put our sensitive daughter through such turmoil for our own retirement sake.  For those issues, we donít think this is a good option to take.

My wife and I have considered many other options for retirement, and weíve come to think that ageing in place and renting part(s) of our house through home sharing for rental income is the most desirable option (especially emotionally).  Fortunately, our house is configured in a way that we could block off certain doors and make a rentable unit, and we would live in the remaining area.  According to my analysis, this rentable unit would help with our retirement but it would not be enough for our retirement in this area.  My wife came up with an idea of using the money from my father to build a bedroom addition (with a bathroom and a wet bar) to our house.  For the next several years, this addition will serve as a place to live for our older daughter who has recently graduated from college and does not yet have a career job (currently, she shares a small bedroom with her younger sister).  After she becomes independent and leaves our house, or at the latest, after our second daughter graduates from college and we retire, it can serve as another rental unit through home sharing arrangement.  It will provide another rental income every year, which will not diminish but will grow over the retirement years (whereas the distributions from IRA or other financial products will diminish over the retirement years), and the cash we spent will remain in the house as equity.  Our housing market is in a strong urban area, and it has not weakened for several decades.  I donít foresee this market becoming weak in the next 10 or 20 years.  I estimate that this additional rental income will make our retirement finances feasible.

We are at the point where our city will approve the building permit as soon as we choose a builder.  We have gotten 2 quotes from prospective builders, but they have turned out to be much higher than expected (about $200,000).  We are currently trying to find less-expensive builders.  To fund those costs, we will likely need to use the money from my father, and some savings (if my wife allows), and use our home-equity line of credit (has never been used).  I will get a distribution from my fatherís life insurance when he passes away in a few years, and it will more than cover the borrowing.  (I am grateful to my father for his love and wisdom to set this life insurance up himself.)  The building costs seem like a big hump that we need to go over but I am afraid of and hesitant with this situation.   I think we can cover the interest expense on the home-equity line of credit from our cash flow, but the interest expense amount will depend on the amount of the borrowing, and that worries me.

I would appreciate it if I could get some feedbacks on our situation.

lbmustache

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You pay $1400 for food per month?
MedicaL is $2400/month? What type of insurance is this (e.g. individual, family, small business, etc.)?
Car stuff is $928/month?

These 3 sound astronomically high.

I am going to leave this for other mustachians to answer because this is beyond my expertise. I don't mean to sound harsh or rude. But it looks like your income is not bad, mortgage is reasonable, especially given the location. House will be paid off when you are over 70. I think there is a "leak" with spending that needs to be addressed. $85k/yr in retirement sounds REALLY high to me, even in a HCOL area.

Mikila

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You pay $1400 for food per month?
MedicaL is $2400/month? What type of insurance is this (e.g. individual, family, small business, etc.)?
Car stuff is $928/month?

These 3 sound astronomically high.

If you can reduce these three, it would go a loooooong way towards helping your financial situation.

forummm

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$200k sounds very expensive for a new room. How much can you realistically expect to get back in rent for it? And you'll probably be on the hook for their utilities too.

Integ139

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"You pay $1400 for food per month?
MedicaL is $2400/month? What type of insurance is this (e.g. individual, family, small business, etc.)?
Car stuff is $928/month?

These 3 sound astronomically high. "

We have tried to reduce food cost; but, it is difficult to keep it low.  We will keep on trying.
We are under Covered California (Obamacare).  As we get older, health insurance costs go up.
Our car insurance expenses are probably lower than average in our area.  We get safe-driver discounts, and we drive very little as we work at home.
Medical costs have been painful for us, but we can't do without them.

As for a new room, I expect we can get $2,000 per month for rent.

Greg

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How many bedrooms is your house currently?  This sounds more like a desire to justify another bedroom for your adult/near adult daughter, than a real need. 

Also, I've never heard of a permit requiring a builder to be named just to be issued.  Is this a SF thing?  Where I live and work in design/build, the permit can be issued before you choose a builder.  Maybe it's just a confusion of terms.

wordnerd

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Even for SF, $2000 to rent a room in someone else's house seems really high. And, even if you could rent it out for that, it would take over 8 years of continuous rental to recoup the building costs (ignoring any costs to find or keep tenants and the opportunity cost of not investing the money). Doesn't sound like a great ROI.
« Last Edit: September 12, 2015, 10:59:41 AM by wordnerd »

GizmoTX

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Having to share a room should provide extra incentive for your older daughter to "become independent" & move out on her own. Having her own room at your house strikes me as a bit too comfortable. Hasn't she been living independently in college?

If you want the additional room for the benefit of the younger daughter, then it's time to get creative with alternative sleeping arrangements for the older daughter, such as an inflatable bed or futon.

JLee

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$200k to add a single room is crazy!  You could buy a very nice house in a LCOL area for (less than) that. i wouldn't do it unless it's going to add $200k in value to your home (which I find unlikely).

Greg

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$200k to add a single room is crazy!  You could buy a very nice house in a LCOL area for (less than) that. i wouldn't do it unless it's going to add $200k in value to your home (which I find unlikely).

Might actually do that in the Bay Area.  Prices there are insane.

justajane

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Re: Should we add a bedroom to our house now for retirement income in the future?
« Reply #10 on: September 12, 2015, 02:36:17 PM »
We live in a LCOL area and paid 75K for a bedroom, bath, mudroom addition that was 400 sq ft. But this included a re-graded yard and a dug basement. Even factoring in HCOL area prices, this seems a little steep. I would get more bids and ask around in your friend circle for contractors that they have used.

Even if you make 2,000 a month, you're talking about 10 years until you break even on the addition. That doesn't sound like a good ROI, except for the fact that it also bring equity to a house in a thriving market. I think that tips the scales somewhat, but only if you rent it out and not just use it for family.

FWIW, we probably only gained 20-30K equity on our house. I would count on a 50% equity boost, i.e. maybe a gain of 100K. So in that sense you would pay back the addition in 10 years, but the equity gained in your home wouldn't be accessible in retirement.

I don't think it's a terrible idea, but like others have said, if you lower your expenses now you will get an immediate gain to your retirement accounts, which you desperately need.
« Last Edit: September 12, 2015, 02:38:46 PM by justajane »

stashing_it

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Re: Should we add a bedroom to our house now for retirement income in the future?
« Reply #11 on: September 12, 2015, 02:56:06 PM »
To be clear

You do daycare in your house, and this is your main source of income ?


I would not add a room onto the house, because I think it would disrupt the daycare business.   Construction will take at least 2-3 months, longer if there are problems.     As a parent, I would not want to send my kids to daycare in a house that was under renovation

Argyle

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Re: Should we add a bedroom to our house now for retirement income in the future?
« Reply #12 on: September 12, 2015, 04:38:25 PM »
This strikes me as a very bad idea.  $200,000 for an extra room sounds astronomical; it will take a long time to break even; and you won't even start to recoup that money for years.  $200,000 in an index fund has a lot better chance of providing you with significant income down the line, in my opinion, even with the risks of the stock market.

In many parts of the country you could buy a mansion for $200,000.  Is staying in the Bay Area vitally important to you?  In the rural Midwest I'm familiar with, you can get a decent small house for $35,000.

But the $1400 for food is a huge leak.  No wonder you estimate that it will cost $85,000 per year in retirement.  Plugging that leak would do more to help your financial situation right now than many other things.  Is part of that money for food and snacks for the kids in the daycare?  In that case you should separate those costs out (I assume they're covered by daycare charges).  How much is your own family spending for monthly food costs?  You could easily get it down to $500 and save $900 per month right there.  That's $10,800 per year tax free. 

Integ139

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Re: Should we add a bedroom to our house now for retirement income in the future?
« Reply #13 on: September 13, 2015, 01:19:29 AM »
Thank you so much for your feedback.

Yes, we should try harder to reduce those expenses that were pointed out. 

I just wanted to say that property markets in SF bay area are very high priced ("insane" looking at it from other places).  For that reason, even many graduates from top colleges can not afford to rent, so they stay in parents' homes in our area.  Even young adults who are married tend to live in their parents' homes because they can not afford renting in our area.   This seem to be a trend here.  It makes more sense to me to build an addition and rent it to my daughter (no rent at first, how long???) than supporting her renting another place (it would be very very expensive).  Currently, our house has 3 bedrooms, but sadly we need to use 1 of them for our business which is our only source of income.  Our daughters sleep in bunk beds in a small bedroom.  Most of our house is used for business.

Our final goal is not to rent to my daughter.  It is to have a rental property.

I said "home sharing" which implies that a renter would come through our living area, but it will not be.  The new addition can be easily made to be self contained, separate from our living area, with separate entrance.

Yes, $200K is a crazy number for an addition.  I was expecting somewhat lower number... I am waiting for 2 more quotes and I hope they are lower. 
I did a quick research through Internet, and estimate that if we do this addition, we will gain an equity increase of about $120K on the spot.  (This may be why contractors seem to be coming up with those high prices.)  Of course, the real estate markets go up and down, and we did have a bad experience long time ago, where we lost equity in our first home when we sold it.  But, that was another market, and my guess is that there is better chance of this market we are in now would retain value even through national markets downturns.

Thank you again.