Time does not fly by, especially in the middle of the COVID-19 pandemic. Probably, at this time last year, we all thought we’d be out of the woods but here we are. It is almost the end of August of 2021 and we are seeing a rise in restrictions with the Delta variant. Face mask mandates are still on and I’m back to full-time work from home. No complaints on my part but hey, not all news is bad news.

Kids had fun at summer camp, we spent some time in the mountains and hung out with my sister and the grandparents in Houston. Perhaps the highlight of our summer was supporting my parents get to the next chapter of their lives. You see, they built a big house back in 2011, moved out in 2016 to start renting it and the time had come to sell it to simplify their lives while in retirement.

Turning Their Home Into A Rental

The decision to sell the property was far from easy. My parents did not build the house thinking they would sell it, nor rent it. For them, it was their retirement home and ultimately an asset they would pass on to their kids. The decision to rent it was an emotional roller coaster but selling it took it to the next level.

Renting the house was triggered by the idea of supplemental income while in retirement. One should never consider a primary residence as an investment; however, we were surprised by the opportunity to partner with a relocation company for expatriates. The arrangement offered benefits such as (a) liability, (b) insurance, (c) contracting, and most importantly (d) comfort working with a relocation company instead of dealing with the tenant.

In general, one should never consider a primary residence as an investment.

House Hacking is an exception

As I said, this property was not a good rental but working with a relocation company made it work. I won’t get into the numbers but the key performance indicators (KPIs) were favorable. The rent-to-purchase price exceeded the 1% rule, the cash flow was in the 4 digits but with the property being paid off the cash-on-cash was ~10-12%. Yes, the idea of a cash-out-refi crossed our mind but we decided not to pursue that option.

Real estate investing can be active and to some extend passive. Active and experienced investors can generate significantly higher returns compared to someone who does turnkey real estate investing.

My parents did a hybrid.

They leveraged a realtor who specialized in working with relocation companies but they did not have a property manager. We debated DIYing the contracts to eliminate the 1-month of rent fee but decided it would be best to proceed with the realtor to leverage his network and minimize the risk of vacancy.

Impact of COVID-19 And The Decision To Sell

There were a total of 3 tenants in the span of 4 years. Despite minor operating expenses, and very little vacancy the property performed as expected but then COVID-19 happened. My parents received a note from their last tenant stating they would leave in September of 2020 prior to their lease expiration in November of the same year.

The relocation company fulfilled the terms of the lease paying rent for the remainder of the contract. The property became vacant in October of 2020.

After 5 months of vacancy and unsuccessful results placing a tenant, we decided the best course of action was to consider selling the property. There were several factors that led to this decision:

1. Uncertainty in placing a tenant with shortage of expatriates.
2. The niche in rent pricing to make numbers work.
3. Eliminate out of pocket operating expenses: utilities, maintenance, HOA and property taxes.
4. Wealth Preservation while in retirement.
5. Take advantage of seller’s market and low interest rates.

And so the journey to sell the property began.

We reached out to the realtor who worked with my parents when they got the property and after discussing strategy, pricing, and agreeing to realtor fees (1.5% instead of 3%) we decided to place the house on the market.

After 5 months, 3 offers that fell through, and numerous calls with my parents and our realtor the house finally sold.

Manage Expectations And Adjust If Needed

Although, the property was priced at a reasonable $/sq.ft per nearby comps, we were surprised by how long it sat on the market. Normally, time on the market is driven by niche, overpricing, or issues with the property. If there is no financial pressure to sell and the property is fairly priced, you could afford to sit on it until the right buyer walks through the door.

For my parents, time was of the essence. A big chunk of their retirement fund was tied to this property so we needed to let it go. For them, it came down to two options:

1. Accept an offer at 4.8% discount or
2. Wait for a full time offer.

After some back and forth we chose option 1. The financial risk and stress were simply too high.

We advised our realtor to accept the offer which included 25% cash, but we counter by including a clause on the agreement to accept the property as-is. In other words, no contingencies related to results from an inspection report. Last, we asked for an accelerated date for closing. The buyers agreed.

Buying a property accepting no contingencies can be risky. One should always schedule a house inspection to make sure there are no skeletons hidden in the closet. Normally, an inspection report is the number one exit strategy from a contract outside of a loan being denied.

An inspection report is the number one exit strategy

That said, bypassing home inspection contingencies can be used as a strategy for both sellers and buyers to improve the terms of the deal in either direction. At the end of the day, you want to get as close as you can to a win-win situation.

An Opportunity To Declutter

I forgot to mention they rented their home fully furnished so step 1 was decluttering. We were successful in selling most of the furniture prior to closing but were still left with a few items that required storage.

We were happy to hear the buyers were interested in the fridge, washer, dryer, and some furniture. We agreed on a number and avoided the hassle of moving, storing, or having to sell them.

However, the best approach for decluttering was networking and word of mouth. Looking back at all the stuff they had, they were left with a dining and living room set. Definitely a big win.

So What’s Next For My Parents

Well, my mom wants to buy a smaller house, my dad wants to continue to rent and I just want them to take some time off from making any decisions.

The last few months have been exhausting so I think we all deserve a nice break.

They currently live in an apartment complex and their lease expires next year so they have time to decide.

It is easy for me to come up with options to optimize their finances. Some of the variables that come to mind include:

• Affordability: Before buying a new place, my parents should have a good idea of what they can afford by factoring in their retirement savings, monthly budget, and earnings from their current home sale.
• Maintenance: narrow their search to single-story homes or a place with an elevator.
• Accesibility: how much maintenance can my parents handle or outsource a month.

But what about their dreams and aspirations?. What is best on paper does not necessarily equal happiness.

My parents never envisioned selling their home. You may ask why … well, let me share some context.

You may find it surprising, but in Venezuela, it is very atypical to downsize. To this day, some of my best childhood memories go back to hanging out with my grandparents during the weekends. Playing and running around with my cousins was priceless.

One additional thing to keep in mind is that back home once your property is fully paid off that’s it. There isn’t such a thing as property taxes so there is no significant cost of ownership other than utilities and maintenance.

Living in the US is different.

Transitioning to retirement requires careful planning especially on your #1 expense, i.e. housing.

Now that things have settled, we are evaluating options. In my opinion, renting while in retirement makes more sense than buying a property.

Although renting does not facilitate building equity, that should not be the primary goal. Instead, it offers lower costs of living with fixed rent, lower utilities, zero maintenance and/or needs for repairs, no property taxes, and owning less stuff.

People often say you’re throwing money away with rent but you shouldn’t look at it that way. Instead, think of it as a utility. We all need a roof above our heads and renting could be a favorable option based on your personal situation.

Just ask people in coastal areas -and Denver- where the disparity between rent and house prices could not be farther apart.

For folks entering retirement, early or late, renting offers benefits that are worth considering.

Final Thoughts

Look, I’m a data-driven guy and like using math to inform our decisions. That said, everybody is different and for some people, emotions can become a variable. I don’t agree but I get it.

I’m not sure what my parents will do next year but all I can do is be there and support them as much as I can. I need to remind myself that it is not about me, it’s about them.

Next year, we will conduct a market assessment to at least give ourselves the opportunity to compare the advantages and disadvantages of owning vs. renting. Until then, we look forward to having them visit the grandkids and enjoy some well-deserved time off.

Supporting my parents through the entire process has been one of the most stressful experiences in my life. To some extend, I feel the stress is still there. After all, the house was the main topic of every conversation for the last 5 months. Needless to say, I’m happy to switch topics for a change.

Until next time … JJ