Alternatives to parents selling childhood home

[Andrew Basom]

My parents are on the verge of retirement (unfortunate timing) and I'm trying to think outside of the box for them with their current retirement strategy. Right now they own a 4BR/4BA home in central PA as their primary residence, which has been fully paid off, as well as owning a 4BR/3BA vacation home near Bethany Beach, DE (about 10 years into that mortgage). The vacation home is where they plan to retire, but they want to renovate it to be more livable year round vs just for summer months. Because of the amount of INSANE renovations they want to do on the vacation/retirement property (some justifiable, some over the top), they intend to sell their primary residence to pay for the renovations. To me, this is the mindset I would expect from their generation, but I wanted to present them a potential alternative and wanted to get your thoughts on how you might handle the situation...

There are likely several options they have, but the one I'm considering bringing up to them is this:

1. Make minor renovations to the primary residence (it's pretty well updated as is)

2. Cash out refinance the primary residence

3. Clean out old furniture/belongings and refurnish what's been cleared out

4. Rent as an MTR (location has 4 major hospitals in 15 min driving distance and strong MTR demand)

5. Use leftover funds to pay for renovations

There's a lot behind these steps so I'll try to summarize the numbers below:

Step 1. Maybe needs $5-10k in updates to flooring in certain rooms, bathroom upgrades, etc. 

Step 2. Conservative estimated value of $550k, so after a 75% cash-out refi would give them about $390k cash after closing (estimated 5%). With about $412k remaining on the mortgage at 7% interest, PITI would be about $3350 with $100 annual HOA fee.

Step 3. Some furniture is outdated/worn and needs replacing for MTR listing

Step 4. Based on the comps on FurnishedFinder in the area, I believe this house could rent for about $4k/month, conservatively. I would offer to manage the property for them and send them the profits to cover for the equity they lost out on by not selling. If they're not comfortable with taking on that debt I could potentially get them to "subject to" the mortgage to me. Ideally it would be cash flowing about $600/month

Step 5. The quotes they've received on their renovations have come in between $500-700k on the vacation home (a home which was purchase for $575k, so WOW, but at the same time it's appreciated almost $500k since the purchase). While the $390k from the refi doesn't cover the entire reno cost, it covers a significant portion. It should be noted they both also have 401k and other funds, for living off of but I did not take those funds into consideration here. It should also be noted that these reno quotes were taken about 1 year ago when demand was higher for contractors, so that cost could potentially come down if reassessed or concessions are made on the renovations. 

I'm sure I'm leaving out details or not considering certain things, so I wanted to share this with the community to see if there is a possibility for my sister and I to keep our childhood home within the family while still helping my parents toward a happy retirement! All alternatives welcome, I'm not beholden to my initial strategy. Thank you in advance

[Caroline Gerardo]

There is no "take over the mortgage" @Kang-Li Cheng no assuming the mortgage @Eliott Elias

no "subject to"

If you cannot demonstrate experience two years managing other real estate how can you honestly tell your parents who you love this is a financial plan?

Cash flow does not seem worth the risks.

If you can qualify to purchase the house and finance as a rental then they are off the hook and get the full cash value. Say they sell for $520000 you have 20% down your payment PITI will be $3462 plus any HOA (not sure where you got your payment from) Then go ahead and manage as you desire.

Other options:

Use a HELOC of $100000 on PA to fix up the Bethany Beach home. No more than that. Then when they sell pay it off and keep the savings to live off principle.

Look at a reverse mortgage for the Bethany Beach house. They are expensive but no payment, only pay tax and insurance. If one dies the other can reside there as long as they live.

Go spend a month in the winter in Bethany Beach BEFORE they decide to do anything. North-east storms aren't fun.

Before they do anything they need bigger advice about the pensions/ssi they will receive; how much $ in 401k; how much they need for the next thirty years to pay whatever they plan. If the Bethany Beach house is two story it might not be the right long term choice to spend a large amount of money. Are they thinking about an elevator and heated driveway? Are they ready for hurricanes? 

I share the instinct you want to keep the PA house and all it's holiday memories in the family. Could it be rented as is for a year without improvements just cleaning while they try out living full time in Bethany Beach? With a professional manager?

Problem is: it is easier to get a loan BEFORE they retire as income is higher.

Also my guess is reason to retire suddenly is health. How far will they be from those who can help?