Smartest way to handle real estate and construction transaction

[Mgmny]

My parents inherited 1/5th of a lakeshore property and small cabin. They are planning/considering purchasing the other siblings out and they want to sell, so no conflict.

Price agreed upon: $290,000


The cabin on the property is uncared for and dilapidated. It needs to come down. My parents are ready to put another 200-300k into the property to build new/renovate.

Their other inheritance from the estate comes to about $300,000 and my parent's pockets are deep generally (but thankfully frugal), so none of this is a financial hardship.

What is the best way to structure this process financially?

There are two pieces and two considerations for each, as I see it.

Land and construction, cash vs financing.

Let's say they have enough to pay cash for one and finance the other. Realistically, they may have cash for both, or at least close to it. Or maybe finance it all because rates are low?? I'm not sure

I'm thinking that a bank would give a better rate if they financed the existing property and paid cash for the construction, but maybe I'm wrong? And are there 2 "closings" (and therefore fees) with a construction loan?

They are inclined to use their cash now for the purchase because they have it and it's easier, but I'm thinking: rates are historically low, and financing the existing location may be smarter...


Who has experience here that can help me make an informed decision? Even a 2% swing between the options could be over $10,000 difference... Thank you!!

[Fishindude]

Sounds like your parents are pretty good with money to start with, so I doubt you or anyone else needs to advise them.

Whole bunch of folks here will probably jump in and recommend borrowing as much as possible and stretching it out long as possible due to current low interest rate environment.   You don't mention their ages, but if they are retired, no longer working, etc. and have the necessary cash, I'd pay cash and not take on any debt.   

The pay cash vs borrow for real estate argument goes round and round here weekly.

[Mgmny]

Sounds like your parents are pretty good with money to start with, so I doubt you or anyone else needs to advise them.

Whole bunch of folks here will probably jump in and recommend borrowing as much as possible and stretching it out long as possible due to current low interest rate environment.   You don't mention their ages, but if they are retired, no longer working, etc. and have the necessary cash, I'd pay cash and not take on any debt.   

The pay cash vs borrow for real estate argument goes round and round here weekly.

Thanks FishinDude. They are frugal and are savers, but i don't know if i would say they are "good with money" beyond that (they are in annuities and high-fee mutual funds, etc etc.) My mother has a "just for fun" job managing a grocerystore 3 days a week and my father still works full time. They are in their late 60s. My dad says he'll never retire,not because of the money, but because there will always be someone who calls him that needs something done (he's an "electrician" but really just a sophisticated handyman for commercial properties).

They come from a "cash is king" mindset, so they would pay cash for everything, even if it isn't the smartest strategy. A super great example: They rarely use a credit card leaving CC rewards on the table because "cash is better." They've always been this way - they aren't recovering from CC debt problems, it's just how they were raised,etc.

So, they are just your standard "work hard, save a lot, don't spend what you don't have" type people - I'm just thinking in multiple, multi-hundred thousand dollar transactions there could be small tweaks that could have a reasonably large impact in terms of dollars.

[terran]

I think loans for land tend to have higher rates (as do construction loans) and if they borrow to buy an existing house then the bank will have a problem if they tear it down. Probably best for them to talk to a banker about this and tell them what they want to do to find out what all the options are.