No! No, no, no. A thousand times, No!
Or maybe, just maybe…
For this blog, two great things about the Ask jlcollinsnh posts are that they help me understand the real world concerns of my readers and they provide ideas for a steady steam of great Case Studies. These are ideas and topics I would have never thought of on my own.
But today’s is a little different. This one gives me a chance to share a story I’ve had pending in the files for over two years. Josiah is contemplating a move quite similar to one I made long ago and his asking about it was just the spur I needed.
Josiah:
Hello Mr. Collins
I have loved reading your website! It is the exact information that I have been craving in regards to where the heck to park my money.
My wife and I are on the road to FI. We have a few more miles to go (10-15 years) but we are on our way. My goal is to never “have” to work a day after my 42 birthday.
With all that being said, my parents are 50 and 53 respectively and are not destitute but pretty poor. They have jobs that are a bit above minimum wage but absolutely nothing in the realm of savings or pensions.
My wife and I have realized that we will be ultimately responsible for them in roughly 30 years as my brother is not in the best boat financially and has expressed disinterest in taking care of them, because of different family issues.
I am going to help them get a Vanguard account and put a bit of money aside for them each month. The big problem is that they are currently spending 600 dollars a month in rent in the middle of Iowa, which is normal if they had kids living with them, but as my brother and I are gone, it’s a bit much, especially with them making just over ends meet.
My question is would it be prudent to buy a cheaper property and rent it to them so they could cut their rent in half, and then after it is payed off when they are in their 80′s that expense will basically be non exist? There are plenty of houses in their community that could be had for around $50K-$70K.
I have read your post about how real estate is not the best investment and I am realizing that I really don’t want to make a habit of getting rentals, but I am wondering since you have owned a house before, is it worth the extra costs that will be associated with owning a home, to provide that stability for them, or should we just find them a cheaper rental?
Thanks for all you do,
Josiah
jlcollinsnh:
Welcome Josiah…
…and thanks for the kind words! Glad you found your way here and thank you for the question. I have actually long been planning a post about the time I did exactly what you are considering. It was a major mistake and I’ll share that story with you, along with some thoughts as to how you might evaluate the decision for your unique circumstance.
But first, congratulations on having your feet firmly on the path to financial independence! And for being clear-eyed enough to see that your parents are not and that this is likely to become your problem. The good news is you will have positioned yourself well to help.
Here’s my tale:
Back in ’79 I was young, single, renting, making good money and very foolish. I bought my mother a condominium, for reasons much the same as yours. It was just about the worst decision I could have made, both financially and psychologically.
My father died in 1974 and in 1976 my mother sold their house and moved to Florida to escape Chicago’s winters and to be closer to her retired brother. She took the proceeds from the house and invested in some dividend paying stocks to supplement her Social Security. She found a lovely apartment near her brother and settled in.
Unfortunately, her stocks failed to keep pace and her rent continued to rise. By 1979 she was expressing grave concerns.
Now, with the benefit of hindsight I can see her concerns were greatly overblown. But at the time I got swept up into them, as us good sons are prone to do. Plus then, like now, (like always, really) the vested interests in the real estate business were relentlessly pounding the drum of how wonderful owning property is.
On a visit I rashly told her I would solve her problem by buying her a condo. I gave her a budget of 40k, a fairly hefty sum in those days, and told her whatever she found in that price range that she liked was fine with me. We agreed she would pay me her current rent of $300 a month and I would absorb the difference and all future cost increases. Not surprisingly, this worked exceedingly well for her. For me, as we’ll see, not so much.
She found a beautiful 2-bedroom, 2-bath unit in a very nice complex. It was a step up from where she had been and it came in under budget. It looked like a pretty neat, if expensive, solution.
To see just how expensive, let’s run the monthly numbers:
$390 — Mortgage payment (interest rates were much higher in those days)
$125 — Association fees
$50 — RE taxes
$565 — Total
So I knew going in I would be supporting mom to the tune of $265 a month. And I was good with that.
But there were two big things I naively hadn’t counted on.
First, I was now her landlord and as such she turned to me for improvements on the property. Not all at once, but over the years: New appliances, carpet, painting and other costly stuff I don’t remember. Maybe because they paled in comparison the the second thing I hadn’t counted on…
The Association
See, this was a building owned and operated by geezers who were retired and had cash on hand. They wanted to keep their money in their own pockets as long as possible and so were loathe to pay a little extra each month to build a contingency fund. The monthly assessments covered only the monthly costs.
So about once a year, sometimes twice in the bad years, I’d get a notice announcing a “Special Assessment” had been approved to re-pave the driveways or re-roof the buildings or some such, and telling me my share. Typically $5-6000. Oh, and by the way, it is due next Tuesday.
Now this is a perfectly fine way to do things for retired folks with money in the bank. But each notice sent me into a mad scramble to pull the cash together in time. At least the first couple of times. After that, I created my own contingency fund.
My mother lived there for about seven years, until 1986. Each year, of course, these costs marched ever higher. Fortunately so did my income, but the cash hemorrhaging was always a shock. Meanwhile, Florida went into one of its routine real estate collapses, just in time for my sale of the property.
So it was financially ugly. But expensive as it was, that would have been OK. It did solve my mother’s problem. But then there was the psychological factors that came in to play. Those started before the condo was even bought.
The Saturday after I returned from my trip to Florida, the one where I had told my mother I would do this, I got a call from one of my sisters. She was not happy.
She got it into her head that somehow I was exploiting our mother and that I was going to make a financial killing on this condo. Now I had no idea at the time just how financially ugly it would get (had I known I would have run for the exits) but I could certainly see that there was no monetary killing to be made.
When she got done yelling at me (and this took a while) I told her I really didn’t want to do this at all (I didn’t) and if she wanted to I would be happy to step to the side and out of her way. Unfortunately, she said she couldn’t afford it. She later suggested we buy it together but, after all the harsh words, I was uninterested in a partnership. That might have been my only smart decision in this sorry affair.
My other sister was considerably more financial savvy than either of us. She could see both the hole I was digging for myself and the way it would ease her share of the burden of providing help to our mother.
Now here’s where the psychology gets really interesting. My mother was a smart woman. She understood intellectually that I was supporting her to the tune of hundreds of dollars each month, thousands each year. But she never saw that money. What she saw, and felt emotionally, was the $300 check she wrote and mailed to me each month. Wrote and mailed to (cue me twirling one end of my imaginary handlebar mustache) her landlord.
Meanwhile, when my sisters would visit once or twice a year, they’d slip her $100 to “help with the extras.” A kind and generous gesture that she very much felt emotionally. And, of course, when I’d visit I would get to hear in detail just how kind and generous my sisters were and what a blessing in a mother’s life such children are.
Now, a better man would not have been bothered by this. I am not that better man. I was the guy doing the heavy lifting.
As a postscript to this story, and in fairness to my sisters, when my mother took ill and moved back to Chicago for the final two years of her life I was living in Cleveland. The heavy lifting of her care fell to the two of them. In retrospect, mine was the easier burden.
So that’s my sad tale. What should I have done instead? That’s easy. I should have said to mom on that trip: “Don’t worry about your rent increases. Just let me know and whatever the amount over the $300 you are now paying I will send to you.” Much cheaper for me. Better psychology, too.
Oh, and then I’d’ve had plenty of spare hundred dollar bills around to slip her on my visits. You know. To help with the extras.
So, enough about me, Josiah. You can decide for yourself how much of this little tale potentially relates to your situation. But here are my thoughts for you….
First, buying your parents a house is likely to turn out to be much more expensive than you might anticipate. While you won’t have association assessments, you will have an endless parade of repairs as all houses require. If your parents are unable to handle these repairs or arrange for them to be done, those efforts will fall to you. As will the costs.
And, of course, the house will have all the drawbacks I describe here: Why your house is a terrible investment.
So why isn’t my answer a simple short and sweet:
Don’t do it!!?
The $600 rent and the houses available for 50-70k you mention is why. This suggests rentals are thin on the ground and pricy, while houses are easily and cheaply available.
You may have read this post: Rent v. Owning, opportunity costs and running the numbers. If not, please do. In it I describe just how to evaluate your choices and compare them financially.
In my experience, renting is most often less expensive. But not always and, from the rough numbers you’ve shared for where your parents live in Iowa, maybe not for you and them. So run the numbers and see where you stand. Owning just might be the less expensive choice.
But for me, the financial case for owning would have to be very compelling before I’d accept the downsides in this situation. When I’ve owned houses they were expensive indulgences I could afford and the benefits made me willing to pay the costs.
In your case, supplementing your parents rent might be the expensive indulgence. Only the numbers will tell. But if renting proves more costly, personally I be willing to pay a fair amount to avoid the hassles and pitfalls.
One final thought.
You mentioned your intention to open and fund a Vanguard account for them. This is a fine and generous idea, but I’d keep it in your name. Unless your parents are willing and able to embrace your style of fiscal discipline, and that doesn’t appear likely, in their name such a fund would be at too great a risk of being dissipated. Plus, if held in their name, upon their death your money will go to the heirs they choose.
Held in your name you retain control and your parents are spared the responsibility while still enjoying the benefits. Perhaps this is the greater kindness.
Good luck and keep us posted.
Addendum #1:
At the same time as buying my mother’s condo I was buying one of my own. You’ll find that little adventure recounted in this series of posts: How I lost money in Real Estate before it was fashionable.
