When Nashville, Tenn., native Stephen Parker recently listed a mobile home that he owns on the rental market, he received about 30 applications in one week. “I priced it competitively,” he said.
Parker, who is also a real-estate agent, said that he sees rent growth staying strong as many people find it too expensive to purchase homes, a situation made worse by low inventory and high interest rates.
He bought his first investment property in 2020, and his portfolio of rentals has since grown. He owns various properties, including a small mobile home park, a duplex and several single-family homes.
“We’ve become a renting nation,” Henry Stimler, an executive in the multifamily capital-markets division at the real-estate firm Newmark, told MarketWatch.
Renters have more flexibility and fewer of the responsibilities that come with home ownership, Stimler said, and they can more easily move to other cities and states. “I don’t think it’s a bad thing,” he said.
Nashville, for its part, was ranked one of the hottest real-estate markets of 2023 by Zillow
Z
.
But with the surge in interest rates and demand, new residents may find buying property in that city expensive.
With homeownership continuing to be out of reach for many, landlords like Parker are poised to benefit. “You may be better off renting, especially if you don’t know if Nashville is where you’re going to be forever,” Parker told MarketWatch.
Mortgage rates began climbing after the U.S. Federal Reserve began raising interest rates in early 2022. On Wednesday, the Mortgage Bankers Association said the 30-year rate was averaging 6.48%, up from 3.22% in early 2022.
Higher rates have added hundreds of dollars in interest costs to home buyers’ monthly payments. Buyers have subsequently seen the amount they can afford to pay for a house shrink, even as there are fewer homes for sale.
The U.S. economic outlook remains unclear — a situation compounded by the crisis in the banking sector. Many Americans are worried about job security and financial stability and are reluctant to purchase a home, according to Fannie Mae
FNMA
.
Some good news: Rents appear to have stabilized. The government’s analysis of the housing sector shows that rents grew 0.8% in February, pushing the increase over the past year to a 42-year high of 8.8%. However, research from private sources — such as Apartment List — indicates that rent growth has slowed. After five straight months in which rents fell, national rents rose by 0.3% in February, the company said.
‘I just want roots’
Jennifer Mark, a 49-year-old autotransfusionist in Goshen, Ind., lives in a $625-a-month one-bedroom apartment with her adult daughter and her husband. She’s been selling cupcake toppers on Etsy to bring in extra money.
But thanks to medical bills that are weighing on her credit score, Mark is not yet able to qualify for a Federal Housing Administration-backed loan and can’t purchase a home, although she has a budget of about $150,000.
Finding a two-bedroom to rent would make homeownership an even more distant prospect. The higher monthly rent would make it difficult for her to save for a home and to pay off the debts that are keeping her credit score low.
The average rent for a two-bedroom apartment in Goshen is $925 per month, up 12% from a year ago, according to Rent.com. For a decent apartment, the cost is closer to $1,200. “My God, rent is so high,” she said.
Renting also comes with restrictions. “If I’m going to be paying this much for rent, then I may as well own and be able to do what I want with my house and not have someone tell me, ‘Oh, you can’t have a cat. You can’t have a dog,’” she said.
She needs to pay off medical bills so she can achieve a credit score of at least 580 — a level she’s already surpassed on newer credit-scoring models not often used by mortgage lenders, like FICO 8 — and qualify for a loan.
Renting does have some perks, she said. She doesn’t have to worry about paying for plumbing or furnace issues, for instance. But owning a home is still her dream, and it remains out of reach. “I just want roots,” Mark said.
A generation of renters?
The data shows a mixed picture for renters: While the U.S. is building a ton of apartments, home prices aren’t expected to fall enough to make owning one affordable for many lower-income Americans.
There are currently over 940,000 apartments under construction in the U.S., up 24.9% from a year ago, which is helping to address demand. The number of multifamily units under construction is at its highest level since 1974.
But the supply is not helping all Americans equally. The U.S. is short approximately 7.3 million affordable, available rental homes for extremely low-income tenants, according to the National Low Income Housing Coalition.
Newer units, meanwhile, have been targeted at higher-income renters, wrote Whitney Airgood-Obrycki, a senior research associate at the Harvard Joint Center for Housing Studies, in a blog post this month.
And while rent growth has moderated for more expensive apartments in more sought-after neighborhoods, Airgood-Obrycki wrote, prices were rising faster at the end of last year for the lowest-quality units.
Landlords are slowing rent increases, Redfin
RDFN
deputy chief economist Taylor Marr said in a recent report, “because they’re grappling with a rise in vacancies as an influx of new apartments hits the market.”
Renters — particularly in the multifamily sector — are more likely to stay put due to high interest rates, Stimler said.
“Those who bought apartment buildings last year and locked in historically low rates before rates started rising, they’re going to be okay, because less and less of their tenants are going to leave and become homeowners,” Stimler said.
Some Americans feel like they are becoming a generation of permanent renters, losing out on the “American dream” of owning a home and building wealth through real estate. But Stimler said he did not think that was necessarily a bad thing.
“Our parents got married at 21 or 22, settled down, bought a home, got on the property ladder, and that was their first property purchase,” Stimler said. “That was a huge milestone then. Today, we don’t have that need anymore.”
“Millennials are much more transient,” he said. “They want to be able to pick up and leave, and go anywhere [and have] the ability to work from anywhere. All of these factors have led to a decline in the demand for single-family homes.”
Wherever you stand on that particular debate, one thing is clear: Landlords are benefiting from an increasingly unaffordable housing market, while millions of renters in the U.S. find themselves trapped.
“One man’s meat is another man’s poison,” Stimler said.
Taylor Swift got her start in the music industry at the tender age of 16, with the release of her eponymous country album in 2006. In the years since, the 12-time Grammy winner has transformed herself into a pop superstar and built her brand into a global powerhouse, selling more than two million tickets for her upcoming “Eras Tour” in a single day and announcing plans to direct an upcoming feature film. Along the way, she has become a savvy businesswoman who has often used her clout to shake up the music industry. Most recently, her decision to rerecord her older albums, ensuring that revenue from those streams go to her, caused a flurry of new standards from her label Universal Music Group NV to make sure other artists didn’t follow suit.
So it’s perhaps not surprising that, in the process of becoming a music-industry juggernaut, Ms. Swift has also amassed an empire in the real-estate world. Despite her relative youth, the 33-year-old has assembled a portfolio of homes worth at least $150 million. With a penchant for historic houses, Ms. Swift—using a variety of trusts and limited liability companies—has acquired significant properties in locations ranging from Nashville, Tenn., to Beverly Hills and Rhode Island. Since most of these properties were purchased years before the Covid-induced real-estate frenzy, their value has risen dramatically in the time they’ve been owned by the country-singer-turned-pop star. While Ms. Swift tends to hold her properties for the long term, she has also sold a few homes along the way, often for a substantial profit.
I’m a recent widow, without any life insurance, and I have limited income. I have a home with an outstanding mortgage of $137,000 in Chicago. My monthly payments are $1,666.
I recently discovered that I may qualify for a Veterans Affairs (VA) loan, so I’m thinking of downsizing to a 3-bedroom ranch, and moving somewhere warmer, maybe in South Carolina. I’m also hoping to sell my house, and list it at $265,000.
But most of the homes in the price range that I’m looking for need work. So my question is: Should I buy a new home, or should I go for the existing home that needs work?
I’m a senior, and I want to leave my children something. But I’m daunted by the process ahead of me.
Signed,
Feeling Anxious and Overwhelmed
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Anxious and Overwhelmed,
I am so sorry for your loss. I hope you are getting the support you need during this tough time.
Regarding your question, do the math and see which makes more financial sense. With the maintenance and repair work involved, does the total cost add up to be less than the cost of a new construction, and ongoing maintenance?
First off, a note: If you list your home at $265,000, it may not fetch that price given how high mortgage rates are right now, and the rising number of unwilling buyers in this market. So temper your expectations.
So let’s say you can comfortably afford an existing home at $250,000, factoring in for future repair/remodel expenses.
Remember, mortgage rates are pretty high — so that shaves more off your budget. But you also are planning on taking out a VA loan, which is a benefit: VA loans have a lower mortgage rate, plus there is no down-payment requirement, and your mortgages are “assumable” — a potential big perk for whoever buys your home.
With an assumable mortgage, the buyer gets ownership of the house and takes over the seller’s home loan, too. As NerdWallet columnist Holden Lewis recently pointed out on MarketWatch: “Picture yourself trying to buy a house when mortgage rates are in the double digits. You find a home seller who has an assumable loan with an interest rate in the single digits. That home may be affordable if you can take over the loan; it might not be affordable at a double-digit interest rate.”
So you say you want to move to “somewhere warmer” within that price range. You also want a 3-bedroom ranch. What can you afford?
Looking at the available inventory of existing-homes on the market, you have some options.
According to Zillow, for a 3-bedroom house under $250,000 in S.C., you have less than 1,000 options to choose from.
Keep in mind: The median amount homeowners spend on renovation projects was $18,000 in 2021, according to a recent study by home-remodeling site Houzz. You may need less, or more, depending on the state of the house. Include that in your budget.
In most cases, yes, new builds are less work in terms of maintenance and repair. But they’re also more expensive overall.
“Buydowns and other incentives that builders may offer can make buying a new construction home less expensive. But finding that home is a tall task,” Nicole Bachuad, senior economist at Zillow
Z
,
told MarketWatch. (Buydowns generally occur when a buyer aims to get a lower interest rate for the first few years of a mortgage.)
“New construction homes are generally listed at a premium, focusing at the higher end of the market. Buyers who are looking for entry-level homes will have a difficult time finding a deal that works within their budget with new construction,” Bachuad added.
Create a budget, and factor in the price of the home you want to buy, your potential mortgage rate, taxes and fees and such, and get estimates or quotes on what it would cost to fix up a home in your price range. Afterwards, tour some new builds and see what offers they have that bring the price of a new home into your price range. See which is cheaper.
Builders may sometimes work with you to see what arrangements could work. When I visited a new construction site in San Jose, Calif., a few weeks ago, I learned that one of the staff suggested the (future) owner get a roommate for a short while to make the home more affordable.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
I have an adult son who is 27 years old and works in the tech industry. He is doing well, but he is not disciplined when it comes to money. He has been living in an 800-square-foot apartment in one of the most expensive cities in the U.S. Buying a place on his own is out of the question given his salary, current property prices and rising interest rates.
My solution to rescue my son from his tiny apartment is to buy a house for him. He is not married. I want him to sign a promissory note and pay me back interest-free over the next 20 years. I want to somehow insert this promissory notice into the title so that he will not be able to sell the house without my consent. Also, if he does not keep up with his payments I will have recourse to take action. I am 99.99% sure that all my concerns will end up groundless, but I want to have this in writing to be sure.
His monthly payments will be important but not critical to my daily life. I have more than enough money to cover my expenses, but it is important for me not to create an opportunity — even to the most innocent mind — for doing something silly. I want to be fair to my son, who has been a very good kid, but I do not want to compromise too much during my own retirement years. I have been working since I was 14 years of age (I’m now over 65), and I recently retired comfortably.
Is this a good plan? Should I proceed with it? Is such a promissory note sufficient, and can that be inserted into the title in the same way a lien works? I love my son, but he is not careful about how he spends his money. I hope that this process teaches him a bit of financial responsibility and that his quality of life improves significantly. That is my main objective.
Please let me know what you think.
Loving Father
Dear Father,
It’s safest to make financial decisions with a cool head and a steely resolve. Of course you love your son, but you should not allow emotion to rule your finances. This will be one of the biggest purchases — if not the biggest — you make in your lifetime, and you will be relying on a third party to pay the bills. Seek legal and financial advice before promising anything.
You would need to arrange — with a real-estate attorney — a promissory/mortgage note and a deed of trust. The former outlines the terms of the loan: the interest rate (0% in this case), when each payment is due, the length of the loan, etc. The latter establishes that your son is obligated to repay the loan and outlines exactly what happens if he defaults.
Alternatively, you could reduce your financial commitment by giving your son a down payment or paying for a portion of the house so that the mortgage repayments are within his reach, cosigning on the loan and putting both your names on the deed. With the 30-year interest rate edging closer to 7%, however, this may be a less attractive option.
If you did cosign on a mortgage with your son and you contributed to the closing costs, that contribution could be viewed by the Internal Revenue Service as a gift if it’s more than the annual exemption ($17,000 for an individual in 2023). Under current rules, an individual may give away $12.92 million in assets or property over the course of their lifetime.
Neil Carbone, trusts and estates attorney at Farrell Fritz, said you could provide your son with an intrafamily mortgage loan. “Intrafamily loans can be good estate-planning vehicles because the interest on such a loan is generally lower than can be obtained through a commercial lender,” he says.
“The interest rate will typically be set at the AFR, or applicable federal rate, which is the lowest rate that can be charged without the loan being considered a gift. Another benefit of an intrafamily loan is that the repayment terms can be more flexible than a commercial lender may be willing to provide. “
For example, the loan can provide for payments of interest only for a period of time, with a balloon payment at the end, he says, and the loan must be carefully documented and the mortgage will be listed as a lien against the property, so you will have protection if your son fails to make the payments.
This gift would change his life and show him how fortunate he is to have such a generous father, and he should — in theory — change his ways. Unfortunately, however, life rarely works like that. Financially reckless people don’t change overnight and, if the years I have spent writing this column have shown me anything, it’s that free gifts rarely spark a complete transformation.
In fact, they risk doing the opposite. Free gifts often have the capacity to seem like a reward for imprudent behavior. Although you expect your son to meet his monthly obligations, as any landlord will tell you, you should prepare yourself for a missed payment here and a missed payment there, or for 90% of the payment one month and 100% the next, followed by 70% the next.
You should ask your son some questions before you go ahead with this: Has he paid off his credit-card debt? Does he have six months’ worth of emergency savings? Would he submit to a monthly “wallet check” over a period of six months to make sure he can stick to a budget and resist the temptation to overspend? Would he agree to meet with a financial planner?
You should also meet with a financial planner to “stress test” your finances. How would a default affect your credit? Will you incur a gift tax? What if you had a medical emergency or needed long-term care? From what you say in your letter, your son may not be in a position to help you out. Do you have long-term care insurance?
And be prepared for the unexpected. Home values generally go up over time, but they can also fall without warning. The housing market has been on a tear for the last three years, but there could come a time when property values fall and the house is worth less than what you paid for it, or less than what you owe if you decide to take out a mortgage.
Alternatively, you could create a trust for your son’s benefit and put the house in that trust, and make a gift of cash to the trust, which could be used to purchase the house, Carbone adds, and as a beneficiary of the trust, your son could be permitted to live in the house rent-free provided that he pay for the upkeep of the house. (Or, preferably, charge him rent and ask him to be responsible for the upkeep, so it keeps him accountable and also helps with your own cash flow.)
Hard knocks, learning from past financial mistakes and wins, and appreciating the value of a dollar by working hard for what he has — along with advice from a financial adviser and trusted attorney — are far more likely to help your son than the proverbial gift horse. Your son, like millions of people his age, is living in a small apartment and getting a sharp dose of reality.
It is, regrettably perhaps, a rite of passage. But it will help build character and allow him to appreciate any steps he takes up the property ladder in the future. He may even look back on this part of his life fondly. The gift of a house should be more than a way to teach him a bit of financial responsibility. In fact, I recommend him meeting a series of goals if you decide to sign on the dotted line.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
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Dear MarketWatch,
I’m from New Jersey. My daughter and I are looking to invest in a multi-family unit for our family. I’m retired and live in a luxury apartment paying $2,000 a month for rent, soon to increase to $2,200.
My daughter is a homeowner and her property currently has $75,000 to $100,000 in equity.
We would like to know if it would make sense for my daughter to sell her home (she would make at least $75,000 at the rates homes are selling in her area), and we move together into a rental home for $3,300 a month, and plan to wait a year for the housing prices to go down before purchasing a multi-family?
Thank you.
Timing the market
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Timing,
Given the headwinds in the housing market right now, I’d say, go for it: Sell now, and slowly start looking for a home to buy.
As a buyer, the environment isn’t great. The number of homes for sale is low, as homeowners are locked in to ultra-low mortgage rates. They’re not going to give that up easily, so you have few options. That will also keep prices relatively high in New Jersey.
Plus, mortgage rates are still above 6% still, which means you’re gonna have to budget for higher monthly payments.
Interest rates may fall this year. “I think 2023 will be a year of volatility. The economy is already performing better than many expected, which is giving the Fed less of an incentive to cut rates,” Mohannad Aama, a portfolio manager at Beam Capital, recently told MarketWatch.
But as a seller, this same environment presents a great opportunity.
“We have an extreme lack of inventory that is causing the market to favor sellers at almost every price point,” Melissa Rubenstein, a Realtor for Christie’s Real Estate New Jersey, told MarketWatch.
“‘We have an extreme lack of inventory that is causing the market to favor sellers at almost every price point.’”
But do adjust your expectations. The house may not fetch the price you both have in mind. According to one study by Wharton, some homeowners list their home prices higher than the market rate. As a result, homes stay on the market longer and, as the Wharton report notes, listing a house at above the market rate creates a “psychological dependence on the original purchase price [and] generates an aversion to losses that is 2.5 times larger than the prospect of gains.”
Timing the sale before the spring may work out for you. Spring is generally the start of the home-shopping season.
“I would take advantage of that situation and get the most money possible for your daughter’s home before any rush of inventory in the spring,” Rubenstein added.
So yes, it may make sense to move ASAP on selling the home. But wait before you buy, either for rates or prices to drop, or inventory to rise.
Plus, homeowners are starting to turn to the rental market for cash flow, so you may actually get a discount on rents too, in New Jersey.
But be warned: There are no guarantees when trying to time the market.
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I’m a 65-year-old married man in Southern California. I retired about 5 years ago, and have very little in pension payments of about $2,000 from my old job, without any medical benefits.
But I have rental income from about a dozen single-family homes that I collected during my professional career as a civil engineer.
Some of these homes have mortgages, and others are free and clear. I currently manage and maintain all of them myself. Even though I’m retired, it feels like I’m holding two full-time jobs, that of a handyman and a bookkeeper.
I’m still able to do them for now, but looking ahead to five to 10 years, I’m not sure if I’ll still be able to.
So my question is, what are my options with these homes? Should I sell? Should I consolidate the single-family homes? And how can I make it such that they can give me good income to help me in my retirement, and free up my time, so that I can really enjoy my retirement?
Retired With Two Full-Time Jobs
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Retired,
While lucrative, managing a dozen properties while retired doesn’t quite seem like the retirement people usually envision.
It’s hard to keep track of tenants, track rent payments, keep up maintenance, insurance and mortgage costs, and so many other things. So why not hire a property manager or someone who is experienced at doing this sort of thing for a living?
I know they’ll charge you a fee, but for all this hassle, it may be worth it. Do the math and see if it makes sense for you to get someone to help. If you’re able to offload the day-to-day tasks, you can focus on enjoying your retirement.
Justin Giles, who has been investing in real estate for nearly two decades, told me that you may be able to get a “good deal” with that many properties in your portfolio.
“If the properties are cash flow positive, he can live on that income plus his pension to delay Social Security for the next five years,” he said.
If they’re not, then he suggested that you take out a rental portfolio loan to help you get some cash. (But do your own research before you decide to go that route, and consider the downsides.)
As to whether you should consolidate: If you’re able to run these operations efficiently, perhaps even more so with that future property manager, then why rock the boat? Plus, you might incur more expenses by doing that.
Let’s say you want to consolidate by swapping out a couple of these single-family homes for an apartment building. It may be easier to run that operation, but “swapping out might be difficult in [Southern California] because prices are so far above rents in most areas,” Giles said, “that rent yields are low.”
Since you’re trying to optimize this portfolio to give you good income during your retirement, you may be better off sticking with the houses you’ve got already.
So I’d say look for help: Find someone who can take over your two full-time gigs for a good rate. Enjoy that well-earned retirement.
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Question: I am reaching out for help hiring an advisor. My salary is $101,899, with a bonus that can vary each year but last year it was $17,000. I would like an adviser who will proactively help me grow a portfolio, tell me where and when to invest and work with my accountant that helps maintain and reach my goals. I am also looking for someone who helps late savers. Note that I have student loans, I’m securing a mortgage now, I don’t have a car loan, I’d like to live on as little as possible and I’d like to secure rental properties as part of my investment strategy. (Looking for a financial adviser too? This tool can help match you with an adviser who might meet your needs.)
Answer: Kudos for coming to a place where you’re now looking to save and invest for your future — no matter how late in the game you feel you are. A financial adviser could be of help to you, but it may be tougher to find someone to help you at your wealth level, as many advisers have account minimums.
That said, it’s not impossible, and your best bet may be an adviser who works on an hourly or flat-fee project basis. “These types of advisers are often more willing to help you address the full spectrum of financial planning issues,” says certified financial planner Joe Favorito at Landmark Wealth Management.
Looking for a new financial adviser or have an issue with your current one? Email picks@marketwatch.com.
Pros recommend searching on sites like CFP Board, the National Association of Professional Financial Advisors or XY Planning Network. “NAPFA and XY Planning Network are industry organizations that help promote fee-only financial planning and they offer tools to assist consumers with their search for a financial adviser. Typically, you can filter by location and an adviser’s specialties,” says certified financial planner Mark Humphries at Sentinel Financial Planning. (Looking for a financial adviser too? This tool can help match you with an adviser who might meet your needs.)
Look, too, for a fee-only adviser, as they are paid a set rate for their services rather than a commission on the products they sell or trade. And look for someone who has experience where you need it, such as with real estate investments, investing and budgeting. (Here are the 15 questions you should ask any adviser you want to hire.) “The advantage of working with an adviser is that you can develop a plan and monitor and track your progress,” says certified financial planner Anthony Ferreira at WorthPointe Wealth Management. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)
After you’ve narrowed down several prospective advisers, speak with them to get a sense of their philosophy and to understand if it matches yours. “I believe finding the right financial adviser is more than someone who can crunch numbers and make recommendations. It’s finding someone you feel comfortable with and are not hesitant to be honest with,” says Humphries.
Discuss the pros and cons of all different investment solutions, including investment real estate. “Just like getting advice from your doctor or coach or physical trainer, the advice may not be what you want to hear,” says Ferreira.
You mention working with an accountant, and certainly, many folks have both an accountant and a financial planner who fulfill different needs; ultimately your accountant and financial planner can work together to make sure they’re on the same page regarding your financial situation. Just consider whether you need both: While accountants typically handle auditing work, tax preparation and some financial forecasting, financial planners assist with things money management and retirement planning.
Looking for a new financial adviser or have an issue with your current one? Email picks@marketwatch.com.
Questions edited for brevity and clarity.
The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.
My husband and I bought a second home two years ago, for $160,000, with a 30-year mortgage at 2.5%. We bought it with the sole purpose of renting it out to our son and his new wife.
They were recent college graduates, and just starting their careers. They’ve made this house their home. And it’s been a wonderful arrangement where they cover all the costs, and have maintained and even improved the property.
But now, since they’re earning good money, they would like a home of their own. All four of us want to turn this rental agreement into a scenario where they own a house.
Because of the 2.5% rate, none of us are interested in selling the house and getting our rates jacked up to 7%.
We are considering keeping the mortgage under our name, and serve as the bank, and have our son pay all the expenses, and for the house to be his. This was the plan we had in our mind, and would be formalized in a written agreement.
“‘We are considering instead to keep the mortgage under our name, and serve as the bank, and have our son pay all the expenses and the house be his.’”
When he decides to eventually sell, we’d get our down payment, expenses, and a bit of the equity back. They’d keep the rest.
Now the house has appreciated by approximately $50,000 at this point.
Here’s my question: Is this a bad idea? We know there must be tax implications, and other pitfalls, but we just can’t seem to figure this out.
Keeping it in the family
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Keeping,
The plan makes sense to me. If your son pays all the expenses regularly for the house, including insurance and mortgage, while you act as a backstop, then I don’t foresee any big issues.
“Anyone can assist their parent or any other person in making a mortgage payment,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch.
““Anyone can assist their parent or any other person in making a mortgage payment.””
But check if your mortgage is an assumable loan. If it’s an assumable loan, that means your son can buy your home by taking over your mortgage, Aaron Kovac, an Austin-based mortgage broker told MarketWatch.
But most conventional mortgages aren’t assumable, he added.
And also consider the tax implications. If your son is paying off your mortgage, it can be considered a gift for up to $17,000 in 2022, according to the Internal Revenue Service. And since spouses can give double, after $34,000, he will have to pay taxes on payments for that year.
But at the same time, there are drawbacks to your son paying off your mortgage.
While there’s no prohibition against doing so, he won’t get credit for making the payments. So he may want to consider that.
Plus, he also won’t be able to enjoy the tax benefits of making the payments, Cohn noted. In other words, he won’t be able to claim the mortgage-interest deduction on his tax return.
And finally, keep in mind that ultimately you will be responsible for the mortgage in your old age, regardless of your financial circumstances.
If you serve as the bank, and your son ends up not paying for some reason in the future, you’ll be the safety net, and you need to pay off the rest of the loan.
Imagine you’re in your 80s and this arrangement persists. If your son ends up in a situation where he’s not able to pay, you’re still on the hook since the loan is under your name.
And in that situation, you’re expected to cover him, in your old age, regardless of how big that monthly amount may be.
So talk to him about how he plans to resolve such a scenario when it comes up.
Overall, your plan seems to make sense, albeit with some drawbacks.
But as Cohn puts it, considering how much higher rates are today, the benefit of losing a tax deduction in exchange for keeping a historically low mortgage rate is definitely clear.
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Question: I was a victim of FOMO during the housing market craziness and bought a house for $200,000 over the asking price. Now house prices are coming back to reality, and I feel like I lost my hard-earned money. I don’t know what to do as I am living with constant stress thinking that I made a big financial mistake, and I’m not sure if I should consult a financing advisor for better decision-making and long-term investment planning. (Looking for a financial adviser too? This tool can help match you with a financial adviser who might meet your needs.)
My wife and I are in our 30s and are working in the Bay Area and making about $320,000 combined yearly. We live an average life and watch every dollar that we spend. We bought our first condo in an average neighborhood back in 2016 as we didn’t have kids at that time and we wanted to stay close to our job location since we both had to go to the office pretty much every day.
In 2021, we had a child and started thinking we needed more space. We wanted a good/safe neighborhood, good schools, and a good work-life balance with a hybrid work option. I started to look for a place with these needs in mind knowing that the housing market was crazy, and we would need to go over the asking price. We found a house (nice neighborhood and schools, however very far from our job location and not big as we wanted) and put an offer $200,000 over the asking price (we were disappointed as our prior few offers were not selected). We closed the deal in March 2022 and went for a vacation because we really wanted to recharge.
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After coming back from vacation, we didn’t end up relocating to the new house, because I wasn’t sure that I would be able to go that far from my job’s location and from our current friend circle. We decided to continue our stay at the condo we bought in 2016, and we rented our the house we bought this year (monthly mortgage is $4,450 inclusive of everything, however we’re only getting $3,250 in rent). I feel like I made a very bad financial decision and am doubting my skills to manage finances/investments effectively. What should we do?
Answer: First of all, know you’re not alone: This has happened all over the country as tight inventory forced bidding wars. And kudos for knowing that it’s time to face the music and figure out what to do next — by looking at what’s going on and considering hiring a financial professional to give you advice. (Looking for a financial adviser too? This tool can help match you with a financial adviser who might meet your needs.)
Step one is to “do a complete financial evaluation of the house,” says certified financial planner Chris Chen of Insight Financial Strategists. “It’s now a business, so what does the profit and loss look like? We know you’re losing $14,400, but is this a complete accounting or just the mortgage, less rent?” says Chen. Indeed, certified financial planner Timothy Parker of Regency Wealth says that: “Given depreciation expense and maybe interest, you may be cash neutral on the monthly cash flow.”
Parker adds that you’ll need to “look at your cash flow and the current value of the rental home and the outlook for real estate values in the future. It could be that the investment will work out or it may make sense to sell,” says Parker.
Since it’s a rental property, if you sell at a loss, you may be able to write off some of the loss on the property sale for tax purposes. That said, “it’s important to review your tax situation. Real estate is one part of an investment portfolio and an adviser would likely opine on your other savings and investments, taking into consideration your tolerance for risk,” adds Parker. (Looking for a financial adviser too? This tool can help match you with a financial adviser who might meet your needs.)
Selling isn’t your only option, and it might not be the right one. “What is the likely future of the property? With inflation raging, we would be justified to think that rent will increase over time and eventually will make the property pass breakeven on a cash flow basis. At that point, at least the investment will not be bleeding cash,” says Chen.
Once you have these elements in place, Chen advises thinking about what you want out of your life and financial plan. “How does an expensive rental fit into your future? What would you do with the money if it sold?” says Chen. It seems like you could use a real financial plan to figure out some of the answers to these questions.
Do you need a financial planner to help?
It can certainly help, but if you feel you can do this on your own, it’s not necessary.
“Working with a financial planner to carefully weigh different considerations before making your next move would give you an expert outside perspective,” says Kate Wood, home expert at NerdWallet, who thinks your instinct to talk to a financial planner is a good one. “You could also potentially talk to a local real estate agent to get a sense of what’s going on in your market now, giving you more data to inform your planning,” says Wood. (Looking for a financial adviser too? This tool can help match you with a financial adviser who might meet your needs.)
If you just need someone to help you get started, you might want to find an hourly financial planner with real estate experience. Garrett Planning Network has a feature that allows you to search for qualified financial planners using areas of expertise. “XY Planning Network has people who work under a variety of models and some of them offer hourly services. When you check an adviser’s profile there, you can see if they offer hourly advice,” says certified financial planner Justin Pritchard of Approach Financial. This can also be the most economical way to employ an adviser to your advantage as hourly, fee-only financial planning typically costs between $200 and $500 per hour depending on the adviser’s experience.
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Questions edited for brevity and clarity.
The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.
‘My son is not careful with money’: I want to rescue him from his ‘tiny’ 800-square-foot apartment. Should I buy him a home, and have him sign a promissory note?
I have an adult son who is 27 years old and works in the tech industry. I love my son, but he is not disciplined when it comes to money. He has been living in an 800-square-foot apartment in one of the most expensive cities in the U.S. Buying a place on his own is out of the question given his salary, current property prices and rising interest rates.
My solution to rescue my son from his tiny apartment is to buy a house for him. He is not married. I want him to sign a promissory note and pay me back interest-free over the next 20 years. I want to somehow insert this promissory notice into the title so that he will not be able to sell the house without my consent. Also, if he does not keep up with his payments I will have recourse to take action. I am 99.99% sure that all my concerns will end up groundless, but I want to have this in writing to be sure.
“‘I am 99.99% sure that all my concerns will end up groundless, but I want to have this in writing to be sure.’”
His monthly payments will be important but not critical to my daily life. I have more than enough money to cover my expenses, but it is important for me not to create an opportunity — even to the most innocent mind — for doing something silly. I want to be fair to my son, who has been a very good kid, but I do not want to compromise too much during my own retirement years. I have been working since I was 14 years of age (I’m now over 65), and I recently retired comfortably.
Is this a good plan? Should I proceed with it? Is such a promissory note sufficient, and can that be inserted into the title in the same way a lien works? My son is not careful with money. I hope that this process teaches him a bit of financial responsibility and that his quality of life improves significantly. That is my main objective.
Please let me know what you think.
Loving Father
Dear Father,
For many young people living in big cities in 2023, an 800-square-foot apartment would be an absolute luxury.
It’s safest to make financial decisions with a cool head and a steely resolve. Of course you love your son, but you should not allow emotion to rule your finances. This will be one of the biggest purchases — if not the biggest — you make in your lifetime, and you will be relying on a third party to pay the bills. Seek legal and financial advice before promising anything.
You would need to arrange — with a real-estate attorney — a promissory/mortgage note and a deed of trust. The former outlines the terms of the loan: the interest rate (0% in this case), when each payment is due, the length of the loan, etc. The latter establishes that your son is obligated to repay the loan and outlines exactly what happens if he defaults.
Alternatively, you could reduce your financial commitment by giving your son a down payment or paying for a portion of the house so that the mortgage repayments are within his reach, cosigning on the loan and putting both your names on the deed. With the 30-year interest rate edging closer to 7%, however, this may be a less attractive option.
If you did cosign on a mortgage with your son and you contributed to the closing costs, that contribution could be viewed by the Internal Revenue Service as a gift if it’s more than the annual exemption ($17,000 for an individual in 2023). Under current rules, an individual may give away $12.92 million in assets or property over the course of their lifetime.
Neil Carbone, trusts and estates attorney at Farrell Fritz, said you could provide your son with an intrafamily mortgage loan. “Intrafamily loans can be good estate-planning vehicles because the interest on such a loan is generally lower than can be obtained through a commercial lender,” he says.
“The interest rate will typically be set at the AFR, or applicable federal rate, which is the lowest rate that can be charged without the loan being considered a gift. Another benefit of an intrafamily loan is that the repayment terms can be more flexible than a commercial lender may be willing to provide. “
For example, the loan can provide for payments of interest only for a period of time, with a balloon payment at the end, he says, and the loan must be carefully documented and the mortgage will be listed as a lien against the property, so you will have protection if your son fails to make the payments.
“‘This gift would change his life and show him how fortunate he is to have such a generous father, and he should — in theory — change his ways. Unfortunately, however, life rarely works like that.’”
This gift would change his life and show him how fortunate he is to have such a generous father, and he should — in theory — change his ways. Unfortunately, however, life rarely works like that. Financially reckless people don’t change overnight and, if the years I have spent writing this column have shown me anything, it’s that free gifts rarely spark a complete transformation.
In fact, they risk doing the opposite. Free gifts often have the capacity to seem like a reward for imprudent behavior. Although you expect your son to meet his monthly obligations, as any landlord will tell you, you should prepare yourself for a missed payment here and a missed payment there, or for 90% of the payment one month and 100% the next, followed by 70% the next.
You should ask your son some questions before you go ahead with this: Has he paid off his credit-card debt? Does he have six months’ worth of emergency savings? Would he submit to a monthly “wallet check” over a period of six months to make sure he can stick to a budget and resist the temptation to overspend? Would he agree to meet with a financial planner?
You should also meet with a financial planner to “stress test” your finances. How would a default affect your credit? Will you incur a gift tax? What if you had a medical emergency or needed long-term care? From what you say in your letter, your son may not be in a position to help you out. Do you have long-term care insurance?
And be prepared for the unexpected. Home values generally go up over time, but they can also fall without warning. The housing market has been on a tear for the last three years, but there could come a time when property values fall and the house is worth less than what you paid for it, or less than what you owe if you decide to take out a mortgage.
Alternatively, you could create a trust for your son’s benefit and put the house in that trust, and make a gift of cash to the trust, which could be used to purchase the house, Carbone adds, and as a beneficiary of the trust, your son could be permitted to live in the house rent-free provided that he pay for the upkeep of the house. (Or, preferably, charge him rent and ask him to be responsible for the upkeep, so it keeps him accountable and also helps with your own cash flow.)
Hard knocks, learning from past financial mistakes and wins, and appreciating the value of a dollar by working hard for what he has — along with advice from a financial adviser and trusted attorney — are far more likely to help your son than the proverbial gift horse. Your son, like millions of people his age, is living in a small apartment and getting a sharp dose of reality.
It is, regrettably perhaps, a rite of passage. But it will help build character and allow him to appreciate any steps he takes up the property ladder in the future. He may even look back on this part of his life fondly. The gift of a house should be more than a way to teach him a bit of financial responsibility. And I’m not sure it will help him in that endeavor. In fact, I recommend you have him meet a series of financial goals before you decide to sign on the dotted line.
You have the opportunity to give your son a head start, but I hope that he also learns how to stand on his own two feet.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
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