should i buy a third property (to live in) right now?

[hey mary]

I have 2 rental properties both in Canada. They have appreciated (assessment $1.35 with $300K mortgage). But not producing significant income because they're under rent control.

I can't sell property #1 because my sister lives in the downstairs unit, she's disabled and its accessible. And I am reluctant to sell #2 because its always been part of my retirement plan. It would be great for those late years 70-75 when I want something accessible, close to shops, in a town with stable economy & infrastructure, etc. And easy to add a caregiver apartment (its in Victoria BC).

But right now at age 57 I really want to buy something in SoCal. I live in Santa Monica and pay $2400 in rent: also its NOT rent control so can expect an increase at any time.

Also, my job is suddenly precarious. The owner of my small company may retire.

Right now I have about 80K in cash / down payment and was thinking of something in $450=500 range with two bedrooms, one bath, and a garage. I was thinking that I can furnish the house  and rent one room and then gradually renovate the garage or add a shed on a line of credit with a toilet, shower stall and a kitchen sink/fridge.

And then moving into the reno garage -- and renting both bedrooms -- would be my early retirement plan (age 62-70/75 or whenever I get frail). I would have low overhead, a secure home base to store stuff and come home to. And the I could do what I want which is to live in some of my favorite cities abroad for 6 months to a year each time.

So is this a terrible plan? It would allow me to keep my sister in place, my final home (Victoria) in place, and reduce my costs. Also, the next few months may be the only time I can get a mortgage (if my company goes under).

Re living in garage/shed. Yes, I've lived in micro spaces (although it was actually 300sq/ft). The lack of kitchen wasn't an issue (lack of storage for bike, board etc more problematic). I'm thinking serious downsizing and stuffing things in rafters.

Other stuff (in case its relevant): about $450 in IRA/RRSP (the canadian equivalent). and $1000/month (gross) pension from a job that I had a long time ago (was required to start take at 55). My IRA/RRSP average 5% y/0/y for last ten years, I know thats low but not sure I can take more risks if i'm expecting to start drawing down in 5 years. I was not just a timid investor but a TERRIFIED investor and that has meant I left out some real potential gains.

[hey mary]

I realize my plan is not even worthy of a few punches. I'm grasping at anything and panic that my job is imploding, I'm 57, and I can't see what I am going to do

[Another Reader]

What are you going to find in a decent area down there for that price, especially near Santa Monica?

In your shoes, I would look for another job.  Throw money into your retirement accounts and enjoy your SoCal life in the rental.  In seven or eight years, you may want to downshift and go home.  I'm a bit older than you are and I'm thinking of simplifying things now, so it does happen.

[Cwadda]

hey mary!

Relax, take a breather!

The biggest takeaway from your post is that you feel like you need to own a place to live there, is this accurate for me to say?  Owning is not always the superior option to renting, especially in a HCOL area like California.

You have $1m in equity, but what are your rental properties producing for cash returns each year?  If they're break-even or losing money, a large portion of other MMMers will encourage you to sell and put the money into something that has higher returns, without the headaches of landlording.  If you put a million bucks into the stock market and the return is 7% annually, you're looking at $70k/yr. With the 4% rule, would this put you close to FIREing?

My advice would be to sell the rental properties.  You could always rent in your later years, without the hassle of maintaining your house?  Would you be able to get your sister into an even better living situation? There's gotta be other options for her.

Sorry if my response is a bit scattered, but I'll be checking back on this thread for follow up questions/info.

[tralfamadorian]

...My advice would be to sell the rental properties...

+1

If you have two rental properties assessed at $1.3M with $300k mortgages and 8% selling costs, that is $896k before taxes.  If the places that you and your sister want to live are either rent controlled or HCOL, then your funds will go further if you rent instead of holding property.  Combined with your pension income, then you probably would be or close to FIRE. 

If you could give us more information about what an expected tax cost of selling them would be and the current rent the other's half of duplex where your sister lives and the property in Victoria, then we could calculate how much more holding on the rentals are costing in lost income vs. selling. 

[hey mary]

Thank you for your comments.

I won't sell the house my sister is in. She is too fragile. The house is extensively renovated for her. She relies on her neighbor network. She will be there until she passes. Unless I am a complete ogre.

The upstairs unit is bringing in $22K. Total costs $21K including a $9K depreciation.
The other property is bringing in $14,000. Total costs $15K including a $3.5K depreciation.

The purchase price for both houses was $660K. I honestly until the call with my employer did not think of selling either so, I'm not sure about how tax works. I *think* I would pay capital gain therefore on about $340K? At 25% about $85K?

Regarding selling fees. I'm not sure what is standard in the US. In Vancouver standard (copied from a couple of real estate sites) is 7% fee charged to the first $100,000 of purchase price, remaining balance charged fee of 2.5%.

So that would be, err, hypothetically be about $37K commission & $2K GST to sell both. Leaving about $990 after discharging morgtage. And then paying $82K capital gains tax. Leaving about $850K after tax. Which is US$725K.

Can you see any errors? Maybe $5000 in legal.

I've never made more than 5% y/o/y on investment. That would be $35K.

I have a feeling that the Vancouver and Victoria properties might appreciate more than $35K a year if I am not pushed to sell them. The markets are defiinitely bubbly. But they are also prime for foreign and instra-state investment/immigration. There just isn't anywhere as nice (or warm) in Canada to live. They've shown steady strong appreciation even with 2012 downturn (which was about 15% as far as I remember).

Also I have no idea what FIRE target is (would appreciate a link).

Regarding why I would want to buy in SoCal its because, at any time my rent could skyrocket. Its already (at $2400) under the market average. And I paniced thinking if I lose my job I'll never get a mortage, that option will be closed to me. And even with a mortgage my expenses might be less than $2400 (esp if I get a room mate).

You guys have already calmed me down a little. And although the above numbers are also a bit gruesome they're a start.

I would really appreciate further advice. I just need to know I have a way to get through somehow.  I was just freaked out after the call with my employer.

 

[sokoloff]

If your job is at risk, it seems the very last thing I'd be looking to do is get myself locked into a mortgage and a particular neighborhood/city. In fact, if you had a house there and were looking to sell it and transition into renting because of your job situation, I'd totally understand that.

What are the prospects in your field overall? Are you looking at a 2-week job search (software engineer) or a 6-month-plus job search?

[tralfamadorian]

Your FIRE number is your yearly expenses*25; calculating yours has an extra step since you have a pension and rentals. 

So it would be when your fixed income (pension, etc) + rental profit (if applicable) + stash*4% = your yearly expenses. 

MMM post on the subject:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

[hey mary]

Sokoloff, I consider my employment prospects poor. I'm a 57 y/o woman. I helped my company build a profitable niche consulting business. But I was the back room, some of our clients haven't even met me and, frankly, even if they met me wouldn't remember me an hour later. My employer was the showman, the guy out front.

And I know it seems *insane* to buy a house but I'm increasingly dreading checking my mailbox end of every month to see if I've been given notice. And I have at least a chance of getting a mortgage right now. If you have any insight into CA real estate, I would be so grateful.

Tralfamadorian, based my pension, real estate (minus mortgage, selling fees, tax), retirement accounts, investment & cash accounts, 4% safe withdrawal, and 20% exchange I would have $55K US pre tax right now . So now do I figure out whether I can live on that and start cutting down to that goal?

Again, thank you for giving me something to work on here.

 

[sokoloff]

I'm diagonally across the country, so I have no insight into California RE.

What I'm still puzzled by is you are focused on getting the mortgage, when I'd be focused on paying the mortgage. If your employment prospects are poor, what source of cash will you use to make the mortgage payments over the next 15 or 30 years? Particularly if your two ready sources of cash have self-imposed restrictions on selling.

If your employment in CA ends and you see no reasonable prospects for re-employment, why not just move to your retirement home at that point? (That seems at least better than buying California real estate that you have no particular use or source of cash for.)

I understand you "really want to buy something in SoCal." I think you need to temper that desire with some realism about you'll make the cashflow work so that desire doesn't wreck your financial future. You're in a pretty good spot asset-wise (net worth well over a million and if you value the pension at 25x the gross, you're a 2-millionaire), but I don't see enough cashflow if you do lose your current employment. Taking on another mortgage puts a crimp in your cashflow; it doesn't add to it.

[Another Reader]

In your shoes, I would start looking for a job today.  Yes, you like your current job, but it could disappear at any time..  Your employer won't have more than a bit of regret at terminating your business relationship.  Neither should you.

If, after beating the bushes, I could not find employment with satisfactory compensation, I would start thinking about how to live on $55k US.  Not likely feasible with $2,400 rent.  Not going to be able to pay a SoCal mortgage on that.  I would probably look at how the numbers would work back in Canada to see if I could be comfortable up there.

[tralfamadorian]

So now do I figure out whether I can live on that and start cutting down to that goal?

Yes, see what $55k/yr looks like for you.  Because that's what you are worried about, right?  That your current employment would end and the fear of where that would leave you.

Normally for someone looking at house hacking (living in one space and renting out the rest), I would recommend considering a 3.5% down FHA quadplex.  I'm not an expert on CA real estate but I don't believe that is an option where you are looking because 1) FHA now requires that the market rent of all units * 85% >= PITIA and 2) the current vogue of instituting rent control in CA communities, the very real litigation risk that CA landlords carry and the general very pro-tenant state laws.

And +1 everything another reader said.

[hey mary]

Ok. So I think I have a (sort of) plan.

(a) I will poke around in Long Beach to really clarify whether a house could provide +stability +lower living cost (compared to my $2400 rent). I appreciate the answer is "no" but, would like to feel I explored it more deeply

(b) I'm also going to look into home sharing, both, whether its something I should look at now (become a roomie to save money) and whether its an option for that wished-for Long Beach home (i get one or two roomies to lower costs)

(c) I'm going to think whether I can build out a (very tiny) part of our consulting business on my own. There is a kind of research I do that might a (limited) stand alone product and a bit of monthly income. I'm uneasy but, I really do need to do something.

Also, can I ask, how do other people calculate / target a "livable" retirement income?

As I approach age 60 my health insurance premium will be gruesome, probably more than my household expense (one reason I want to stay in SoCAL is that I think the individual market here will be more stable) (in addition of course to SoCAL being an unbelievably great place to live). But its a huge unknown.

[Another Reader]

Targeting a livable income requires tracking all of your expenses for six months or a year and adjusting for things that don't occur in that period such as a new car, health issues not covered by insurance, the rising cost of health insurance that you would no longer get through work, trips back to Canada to deal with family issues up there, and so on.  Ideally you track for a couple of years before retirement, but that may not be possible in your circumstances.  Once you have a detailed picture of your expenses, you can gross up the income to cover taxes.

I also think you would benefit from forums that are oriented to older people in similar circumstances, such as early-retirement.org. 

You could not pay me to live in the areas of Long Beach where houses are $350k or less.  There is a reason prices are that low.  Those areas are war zones.  If you love Southern California and want to retire there, sell a property in Canada and buy something here from which you can earn some income while living there.  If I were positive I was returning to Canada, I would rent.  Real estate prices will likely decline sometime in the next eight years as the cycle turns.  You don't want to have to sell with no equity in the property.

[hey mary]

Another reader, thanks. I can and will do this using my cc statements (I charge everything to track personal/work/non profit expenses which are easy to mix up - but don't do by category within those divisions).

And thanks again to everyone else. I'm sure I will post other specific questions for your advice later as I put things together !