My in-laws are still paying off the mortgage on two houses and want to build a third. What should they do?

I read your messages often and never thought I would ever email you. I’m reaching out to hear your thoughts on what my in-laws should be doing as they are at a crossroads and don’t know which way to go. They would like to talk to a financial advisor about their situation, but have not yet taken that first step. I hope if you respond, I can give them advice on their situation.

My father-in-law is 66 years old. He is retired and started collecting Social Security last year. That’s what he takes home. My mother-in-law is 57 years old and currently still works as a contractor.

This is the situation: they have two houses. The first home has a principal of $70,000 with about 15 years left on the mortgage – it can be valued at about $165,000 to $170,000. The second home has a principal of $150,000 and can be appraised at $270,000. The first house is paid for by a friend who they help so they can get back on their feet. It is rented for $1,350 per month. The mortgage is € 900,- per month. They barely get by on the mortgage. The second is their primary home.

They want to sell the primary house and buy some land to build another house on. There are no problems with the current house. My mother-in-law wanted to buy land next to her sister so they could help each other as they got older. Their primary home and the home they rent out are 40 minutes apart. The land they plan to buy is 15 minutes away from their primary residence.

They have a friend who owns several properties and advised them not to sell their first home because of the potential income coming in after it is paid off. They are therefore tempted to keep it, but they will have to refinance so that they can withdraw money to build their next home, increasing the loan balance and remaining years. The budget for the new home would be around $250,000 to $300,000, and the money for the down payment would come from selling the primary home and refinancing only the first home.

What would your advice be? Selling both properties to finance construction? Keep the first house for income after it’s paid off? My mother in law would like to retire one day and they are at a crossroads wondering which way to go.

Thank you for your time and attention. Hope to hear from you.


Concerned daughter-in-law

‘The Big Move’ is a MarketWatch column about the ins and outs of real estate, from looking for a new home to applying for a mortgage.

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Dear Concerned,

Your in-laws are lucky to have such a conscientious daughter-in-law, and I’m glad they seem to be approaching this important decision in a careful, deliberate manner.

Not everyone is cut out to be a landlord – the past year has put many to the test, and many have chosen to make a full save. A March survey by the National Rental Home Council found that 50% of single-family home owners had residents who have missed at least one payment since the start of the COVID-19 pandemic. Many were forced to sell their properties: 11% sold at least one property, while 12% sold all their properties.

I think your in-laws should consider selling theirs. It is truly noble that they have helped their friend in their time of need, but it seems that they have found themselves over their heads. While they’re often vilified, being a landlord isn’t easy — and cases like this are proof of that. My guess is that your in-laws probably won’t raise the rent to make sure they aren’t in a precarious position in the house, leaving them few options.

My main concern, however, is time. Your father-in-law is retired and has a steady income, and your mother-in-law is not far from retirement age. Investing in real estate is not for the faint of heart. Their friend told them to keep the house because of the potential income they could earn once the mortgage is paid off.

11% of landlords who own single-family homes had to sell one of their properties because of the pandemic.

If they don’t refinance, they’re at least six years away from that milestone. When they refinance, they just reset the clock. Let’s say they take out a new mortgage for 15 years. By the time it pays off, your father-in-law will be 81. The average life expectancy in the US is 78. Excuse my rudeness, but I’m afraid your in-laws don’t have time to enjoy whatever “potential” gains they might see, not to mention that they seem unable to maintain the house.

And remember, those gains are very potential. Who knows where the rental market will be in five, ten or fifteen years? Who says the house won’t be damaged in a natural disaster or that major capital improvements are needed to attract tenants? Depending on where they live, property taxes on investment properties can rise. There are a number of scenarios that can reduce the profitability of the property and increase its burden.

If they went down the road of getting a cash refinancing of their investment home to help fund the construction of their new home, it’s not that easy. Investment property refinances require larger down payments and have higher interest rates than standard refis. When you factor in the loan closing costs, it limits how much they can expect to receive. And if the bottom fell out, they’d risk losing that house on top of everything else.

Refinancing an investment property often requires a larger down payment and a higher interest rate than a standard refinancing.

If they sell both houses, they gain access to even more money to build their dream home. After all, this might be the last house they live in, and it’s clear they want to build their retirement haven. I also appreciate their foresight in choosing to live near family as they enter their golden years.

However, it is not clear whether they should all do that now. Yes, the market is hot in many parts of the country right now, and they could very well get a decent price for both homes. Unfortunately, the hot real estate market has pushed homebuilders to their limits at a time when they are already dealing with material and labor shortages. I’ve heard of readers who have even bailed their builders because of the outrageous costs they faced.

A better plan might be to unload their investment home first so that they have that money stashed away and available to use when they’re ready to pull the trigger. Hopefully by then the housing market will still be strong and they will be able to sell their primary home for a decent price. By taking more time, they can save more and reassess their financial picture before approaching such an expensive and critical undertaking as building a house.

I hope they find this perspective helpful – and please be careful when presenting it. They’re so lucky to have you looking after their interests, but I wouldn’t want this to turn into a bigger fight, as financial and family matters unfortunately sometimes do. I hope you will continue to be so supportive and caring no matter what choice they make. Still give them encouragement and advice, even if they make a decision you don’t agree with.