Is it a bad idea to take on a 2nd mortgage when nearing retirement?

[Barry Darsow]

I'm asking for advice for a friend.

- He's almost 60 and divorced

- The only property he currently owns is a vacation property out of state. I think he has approx 10 years left on that mortgage, and this is the only property he currently owns.

- As for his primary residence, he's paying a very reasonable rent for a house he likes, probably 400-500 below market rate, but the house is being sold by his landlord this fall. He's on a month to month lease so the new owner can let him stay there (and quite possibly raise the rent; possibly significantly) or send him packing. With a dog, he's going to have a hard time finding another comparable house to rent for the money.

- He found a small house for an affordable price but it needs some work done - some of which he would pay others to do, other work he'd do himself.

His plan is to stay in the area for two years and then at least semi-retire in a couple years and move to where his girlfriend is (who owns a house near his vacation property). At that point, he would then either sell or rent out this house that he is now looking to buy. His girlfriend would like him to move now but his family (mother, adult kids) are in the area he currently resides in and there are not many job opportunities where the girlfriend is.

What would you all recommend? If he bought the house, his mortgage would be half the amount of renting an equivalent house. He is concerned that there will be another 2008 and would have difficulty selling if he needed to sell. OTOH he has been renting since being divorced and see it as throwing money away. Even though he doesn't want to do it, he has hinted selling the vacation property. He would be able to stay with the girlfriend when he vacations there. He would be out of the red by not owning property but would have no property of his own to fall back on if the relationship ends or something happens to her. He is expecting a pension (not huge but would supplement SS).

 

[W2R]

I think he should rent while he winds things up in his present location.

If he does, then he'll be able to move immediately when he retires and he won't have to sell a house, possibly at a loss, in order to move.

If I was him, I'd sell that vacation property now if he can get a good price for it. His life is changing with retirement, and he may have other uses for that money.

 

[REWahoo]

If he married his girlfriend they could live in her house, he would no longer be paying rent, he could sell his vacation home and with all that savings and extra cash, he could retire now.

Next question...

 

[W2R]

If he married his girlfriend they could live in her house, he would no longer be paying rent, he could sell his vacation home and with all that savings and extra cash, he could retire now.

Next question...

Yeah, but some of us who are divorced and have faced financial disaster from it are a little "once burned twice shy" about marrying again, and possibly making the same mistake again.

 

[Barry Darsow]

I think he should rent while he winds things up in his present location.

If he does, then he'll be able to move immediately when he retires and he won't have to sell a house, possibly at a loss, in order to move.

If I was him, I'd sell that vacation property now if he can get a good price for it. His life is changing with retirement, and he may have other uses for that money.

Good points.

He has been thinking about selling the vacation property. He doesn't really want to for sentimental reasons but it does put a dent into his budget, plus he can stay at his girlfriend's place. He does rent his place to relatives a few weeks a year but they could find alternative places to stay if needed.

 

[Barry Darsow]

If he married his girlfriend they could live in her house, he would no longer be paying rent, he could sell his vacation home and with all that savings and extra cash, he could retire now.

Next question...

I would guess that he would be expected to contribute his share of the living expenses including helping her pay her mortgage. Her house is in a trust and going to her kids and her former husband's kids when she passes. If something were to happen to her (she is older than him), he would have to find another place to live.

Yeah, but some of us who are divorced and have faced financial disaster from it are a little "once burned twice shy" about marrying again, and possibly making the same mistake again.

That is true. I don't think he would get married again but who knows.

 

[DrRoy]

I think he should rent while he winds things up in his present location.

If he does, then he'll be able to move immediately when he retires and he won't have to sell a house, possibly at a loss, in order to move.

If I was him, I'd sell that vacation property now if he can get a good price for it. His life is changing with retirement, and he may have other uses for that money.

+1

 

[Walt34]

If he's only going to keep working for two years I'd say rent. That's too short of a horizon to commit to buying a house.

Selling or keeping the vacation property is a coin toss I think. While it's a drain on his finances, it is also a backup plan if something happens with the girlfriend so the decision is about which is more important to him.

 

[Bamaman]

The only way I'd borrow to purchase a small house for a couple of years is if the purchase price AND the reconditioning expenses totaled to half what the house would pull on the market.

And even then, the location would have to be prime--a sure thing that it'd pull big money in 2 years.

Remember that selling a house you've not lived in or one you've only owned 2 years may result in having to pay taxes on any appreciation. Paying taxes takes away some of the motivation to buy and sell.

He probably needs to just rent another place until it's time to move elsewhere and/or retire.

 

[Blue Collar Guy]

this one is easy, i would just rent

 

[haha]

this one is easy, i would just rent

I think he should realize that this a judgment question, not a technical question and be polite enough to keep his friends out of it and make up his own mind.
I admit that a second mortgage seems to be a strange solution.

Ha

 

[Fedup]

I would NOT buy any property for just 2 years. I would definitely rent.

 

[pb4uski]

Yeah, but some of us who are divorced and have faced financial disaster from it are a little "once burned twice shy" about marrying again, and possibly making the same mistake again.

Isn't that what pre-nups are for?

 

[pb4uski]

I would NOT buy any property for just 2 years. I would definitely rent.

I would normally agree... but if he can get a deal and then live in it for two years as his principal residence then any gain on sale would be tax-free so that might be an angle worth thinking about.

 

[Fedup]

What's wrong with living in sin? It might be fun.

 

[Fedup]

I would normally agree... but if he can get a deal and then live in it for two years as his principal residence then any gain on sale would be tax-free so that might be an angle worth thinking about.

How about commission for selling it? High transaction cost, something like 6%.

 

[athena53]

Isn't that what pre-nups are for?

They're no good if you have a lot of assets and you marry someone whose long-term care "plan" is to qualify for Medicaid. Most (all?) states will also hold one spouse legally responsible for the other's medical expenses. A hospital in NJ once tried to garnish my wages for the unpaid medical expenses of my unemployed husband. (We were divorcing and my attorney held them off and they got paid out of his share of the sale of the marital home.)

 

[Scuba]

I would NOT buy any property for just 2 years. I would definitely rent.

+1
The real estate market can change quickly and he could end up being under water. As far as the vacation property, I think it depends on whether he wants that property and how much of a financial drain it is net of rental income. If he could rent it out such that it would provide a positive cash flow, and live with his girlfriend, that could work out nicely.

 

[Barry Darsow]

Thanks for the replies! The consensus seems to be NOT to buy the house. He is in the process of buying it but can still back out. I will have to recommend against it when I talk to him this weekend as he has asked for my opinion. He used to own a rental house and had to sell in a sluggish market after his divorce. It took a long time to sell and he didn't get what he wanted for it. I'd hate to see him go down that path again.

He can either hold onto the vacation property or sell it if it is too much of a financial burden. This sounds like a good idea if he keeps it:

+1
If he could rent it out such that it would provide a positive cash flow, and live with his girlfriend, that could work out nicely.

I'm going to throw another variable into this.

I have been pondering the idea of moving closer to work. I'm really not sure I would want to make this move permanent but thought I would try something different for a couple years. He has inquired in the past whether I'd be willing to sell or rent my house to him. I could rent it to him for close to the amount he is paying now for rent. If I were to make this move, could something like this work (2 year lease?) or is it never a good idea to rent to family or friends?

 

[brucethebroker]

If the major reason not to buy is the fear of "another 2008, and not being able to sell", the best insurance is to read up on being a landlord. Yeah, I know, here come the negative comments....

HOWEVER, it is only one property, he can always pay for professional management as an option and the market would most likely rebound in a couple of years. Since he would be in the same area where he has family and is currently comfortable anyway, it should not be a huge hassle.

We faced this exact situation in 2009, after downsizing. So, we rented out our prior home for 2 years, then sold as the market bounced back. Met the 2 out of 5 years requirement (for 0 capital gains), and sold it for about 20% more than we could have 2 years earlier.

 

[Barry Darsow]

If the major reason not to buy is the fear of "another 2008, and not being able to sell", the best insurance is to read up on being a landlord. Yeah, I know, here come the negative comments....

HOWEVER, it is only one property, he can always pay for professional management as an option and the market would most likely rebound in a couple of years. Since he would be in the same area where he has family and is currently comfortable anyway, it should not be a huge hassle.

We faced this exact situation in 2009, after downsizing. So, we rented out our prior home for 2 years, then sold as the market bounced back. Met the 2 out of 5 years requirement (for 0 capital gains), and sold it for about 20% more than we could have 2 years earlier.

No need to read up on it, he has three decades experience as a landlord.

This purchase could make sense if he's okay with being a landlord as rent he could earn would be significantly higher than the mortgage he would be paying. If he's hell bent on selling after two years, then it doesn't make much sense to buy, but he is open to renting it out.