My in-laws are still paying off the mortgage on two homes and want to build a third. What should they do?

My father-in-law is 66 years old. He’s retired and started collecting Social Security last year. That is what he brings home. My mother-in-law is 57 years old, and she is currently still employed as a contractor.

Here’s the situation: They have two houses. The first house has a principal balance of $70,000 with around 15 years left on the mortgage — it can be appraised for about $165,000 to $170,000. The second house has a principal balance of $150,000 and can be appraised for $270,000. The first house is being paid for by a friend who they’re helping out so they can get back on their feet. It is being rented at $1,350 a month. The mortgage is $900 per month. They’re barely just getting by on the mortgage. The second is their primary home.

They want to sell the primary home and purchase some land to build another home on. There are no issues with the current home. My mother-in-law wanted to buy land next to her sister so they could help each other as they all get older. Their primary home and the house they rent out are 40 minutes apart. The land they intend on purchasing is 15 minutes away from their primary home.

They have a friend who owns multiple properties and advised them to not sell their first house because of the potential income that will come in after it is paid off. They are tempted to keep it because of that, but they will need to refinance so they can take out money to build their next house, which then increases the balance and years left on the loan. The budget for the new place would be around $250,000 to $300,000, and the funds for down payment would come from the sale of the primary home and the refinance of the first house only.

What would your advice be? Sell both properties to fund the build? Keep the first house for income after it is paid off? My mother-in-law would like to retire one day, and they’re standing at a crossroads wondering which path they should take.

Thanks for your time and consideration. Hope to hear from you.

Sincerely,

Concerned daughter-in-law

‘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.

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Dear Concerned,

Your in-laws are lucky to have such a conscientious daughter-in-law, and I’m glad they appear to be approaching this major decision in a careful, deliberate manner.

Not everyone is cut out to be a landlord — this past year put many to the test, and many opted to bail out entirely. A March study from the National Rental Home Council found that 50% of single-family rental homeowners had residents who missed at least one payment since the start of the COVID-19 pandemic. Many were forced to sell their properties: 11% sold at least one property, while 12% sold all their holdings.

I think your in-laws should consider selling theirs. It truly is noble that they have helped out their friend in their time of need, but it seems like they may have found themselves in over their heads. Vilified though they often are, being a landlord isn’t easy — and cases like this are proof-positive of that. I’m guessing your in-laws are not likely to raise the rent to ensure they aren’t in a precarious position on the home, which leaves them with few options.

My biggest concern, though, is time. Your father-in-law is retired and on a fixed income, and your mother-in-law isn’t too far off from being at retirement age herself. Real-estate investing isn’t for the faint of heart. Their friend told them that they should hold onto the house because of the potential income they could earn once the mortgage is paid off.

If they didn’t refinance, they’re at least six years away from that milestone. If they do refinance, they’re just resetting the clock again. Let’s say they take out a new 15-year mortgage. By the time it’s paid off, your father-in-law will be 81. The average life expectancy in the U.S. is 78. Excuse my bluntness, but I worry that your in-laws wouldn’t have time to enjoy whatever “potential” profits they might see, to say nothing of the fact that they don’t seem to be in a position to afford to hold onto the home.

And don’t forget, those profits are very much potential. Who knows where the rental market will be in five, 10 or 15 years? Who’s to say the home won’t be damaged in a natural disaster or need major capital improvements to attract tenants? Depending on where they live, the property taxes on investment properties could increase. There are a number of scenarios that could reduce the property’s profitability and extend how much of a burden it is.

If they were to go down the route of getting a cash-out refinance on their investment home to help fund the construction of their new home, it’s not so straightforward. Refinances on investment properties require larger down payments and carry higher interest rates than standard refis. When you factor in the closing costs on the loan, it limits how much they could expect to receive. And if the bottom were to fall out, they’d be in danger of losing that home on top of everything else.

Selling both homes would afford them access to even more funds to build their dream home. After all this is quite possibly the last home they may live in, and it’s clear they’re looking to build their retirement retreat. I also appreciate their foresight in choosing to live near family as they enter their golden years.

Whether they should do that all now, though, isn’t a given. Yes, the market is hot right now in many parts of the country, and they could very well fetch a decent price on both homes. Unfortunately, the hot real-estate market has stretched home builders to their limits at a time when they’re already dealing with materials and labor shortages. I’ve heard from readers who even had their builders bail on them because of the excessive costs they were facing.

A better plan might be offloading their investment home first, so they have that money stashed away and available to use when they’re ready to pull the trigger. Hopefully the housing market will still be strong by then, and they can expect to sell their primary home for a decent price. Taking more time might give them a chance to save more and reassess their financial picture before approach as expensive and pivotal an undertaking as building a home.

I hope they find this perspective helpful — and please do be gentle in presenting it to them. They are so lucky to have you looking out for their best interests, but I wouldn’t want this to turn into a larger melee as matters of finance and family unfortunately sometimes do. I hope that you will continue to be this supportive and caring whatever choice they make. Still provide them with encouragement and advice — even if they make a decision you don’t agree with.