I have inherited 1/3 of my parent’s property and my siblings and I are debating what we want to do with it. The house is situated in a sought after neighbourhood on a hill with a park across the back lane (no houses behind our house!). The house was built in the 1960s and has not been renovated much. Everything was original: oak kitchen cabinets, tiled kitchen floors, hardwood floors and copper piping. Our dad just installed a new roof and a new boiler last year.
With the real estate market being so hot in Vancouver now, I am guessing the house could easily sell for $900K even though it needs a bit of updating. After all the real estate fees and etc., I am guessing we would each have about $250K in our pockets, if we were to sell it as is.
Problem is: they don’t want to sell due to their emotional attachment to the house. For me, I am okay with selling and pocketing that $250K cash and use it to buy another property. I always prefer NOT dealing with money issues with my family (i.e. joint family business, joint ownership of property and etc.).
Since the house is mortgage free, we had came up with a couple of scenarios
#1: Sell the House as is – Pocket $250K
As I said earlier in the post, if we were to sell it right now, we can probably sell the house for $900K and each of us will pocket about $250K after all the fees. Then we take the money and invest it in mutual funds, GICs, or stocks and have a return of 6% a year, or if my siblings want, they can invest it in another property. Another benefit of selling the house soon: we will not incur much capital gain and won’t need to pay tax on that! I haven’t maxed out my RRSP yet, so if I do incur capital gain, I will be contributing more to my RRSP or max it out to offset the capital gain tax.
After 25 years, the money will grow to close to $1.1 Million! If I retire at 65, I will have almost $2 Million in the bank. Ah… the power of compound interest. I am not much of a risk taker, so seeing this really makes me want to go for this option!
#2: Rental Property: $653.33 monthly income = $7840 / year, but it will take at least 2.5 years to break even due to renovation costs.
If we went with this options, we would need to put in at least $40K – 50K in renovating the house. I’d want to change the windows to double pane, add carpet to the house (hide the nice hardwood floors) and a fresh coat of paint. If possible I’d like to change the copper pipping and update the electric panel in the house, but I know this comes with a hefty price. More importantly, I will need to pretty much rip out the house to get to the pipping and MIGHT find other problems such as mold and asbestos. This could easily push my renovation budget close to $100K!!!!
With all these renovations, we could probably rent out the whole house for $2800 a month to a single family. We would most likely hire a property manager which will cost about 5% ($140/ month) of the rental income monthly. Plus we need to set aside money for house insurance, property tax and utility tax, which comes out to be about $500/ month. Not to mention we’ll need to pay the plumber or the gardener (to mow the lawn) to maintain the house. For this, I am setting aside $200/ month from the rental income.
So with the rental income of $2800 – $840 for all the maintenance cost = $1960 income / month
Split the $1960/ month into 3 ways and each sibling would receive an income of $653.33 a month as rental income.
Let say we each put in $20,000 into the house as renovations.
It would take us 30 months (2.5 years) to break even.
Then we would run into the problem of: when should we sell? If we sell, do we renovate it first before selling or just sell it as is? We know that renters will not take care of your house. They’d probably trash it, so we need to be prepared with some cash to renovate the house before we can sell it. In addition, I will also need to pay income tax on this rental property 😦
I think if my siblings opt for this option, they are not worried about selling the house later. I think they just want to sit on the land and wait for the price to keep going up. They want to keep the house because they know it will be pretty much impossible for them to ever own a house in Greater Vancouver.
However, I think that it is not a bad time to sell now because the market is so hot. No one will know when the Vancouver real estate market will crash. In addition, I will have the be REALLY REALLY good to not spend that $650 that I get from rental income on “stuff”
#3: Take out a $500K line of credit and build a brand new house in 9 months – Pocket: $250K + $75K = $325K
Current House Value: $900,000.00
Cost to Build New House: $500,000.00
Value of New House: $1.4 Million
In order to for us to make any money, we’ll have to sell the house for over $1.8 Million which means the house we build MUST be a pretty damn nice house. I say at least $1.8 Million because after closing cost and paying the interest on the loan to build a new house and maybe some capital gains, we could each at least have an extra $75K in our pockets on top of the $250K if we were to sell it at $900K.
However, I am not sure if $75K is worth all the stress and the risk.
What do you think? Which options would you try to convince your siblings to pick? Or is there another option?
~The Money Pincher ~