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Downsizing With Kids Attached

Smart Moves by by Ellen James Martin
by Ellen James Martin
Smart Moves | January 9th, 2019

After the Great Recession of 2008, many millennials moved back home. Since then, unemployment has plummeted and many more of these “boomerang kids” have jobs. Yet a surprising proportion of them still reside with their folks.

“The extended family is here to stay -- at least for the time being,” says Ashley Richardson, a veteran real estate agent in Maryland.

Richardson tells the true story of a couple of clients with a daughter in her mid-20s -- a barista -- who still lives with them. The parents sought to move from their large, demanding property to a much smaller colonial with a first-floor master suite and a tiny yard.

But the daughter put up a lot of resistance until her parents found a house where she’d also have her own master suite.

Richardson offers a few words of wisdom to downsizers in similar situations.

“Remember, you’ll probably be living in the new place a lot longer than your son or daughter. So always think of your own housing needs first,” she says.

Frank Furstenberg Jr., a sociology professor emeritus at the University of Pennsylvania, sees the big picture on family demographic trends. He notes that many young adults are still saddled with student debt, which slows their transition to independent living. But he contends most parents needn't fear that their offspring will need housing help indefinitely.

“People in the U.S. are marrying later, so the passage to adulthood is longer. But by age 25 to 29, there’s a huge drop-off in the number of young adults still living at home,” Furstenberg says.

Here are a few pointers for downsizers who reside with adult children:

-- Honor your retirement plans.

For people contemplating retirement on a limited income, the idea of keeping a large family home to accommodate grown offspring compels them to dip into savings or stay in the workforce longer than they’d like. Keeping the large family home can also mean continuing to shoulder tiring home maintenance demands.

John Rygiol, a California real estate broker who specializes in helping buyers, says he’s seen too many clients who’ve sacrificed their retirement security to maintain quarters for grown children.

“These kids are eating their parents’ lunch. Mom and Dad shouldn’t have to sacrifice their retirement plans for the kids,” he says.

Of course, many young adults living in the family home are unaware of their parents’ financial situation. Nor do they grasp the full cost of owning and maintaining a large house. That’s why Rygiol suggests that an important first step toward your housing transition could involve a family meeting to go over these realities.

“Sit down at the kitchen table and explain the whole situation to your kids. Outline all your expenses for the big house and why you need to move to economize,” he says.

Obviously, many young adults are well intentioned, and once they realize how important it is for their parents to downsize and cut costs, they’re more motivated to find their own housing solutions, according to Rygiol, who’s affiliated with the National Association of Exclusive Buyer Agents (naeba.org).

-- Don’t rule out a temporary rent subsidy for your offspring.

Given high rental rates in many metro areas, it can be a jarring transition for young people expelled from their parents’ residence without sufficient funds to cover their own housing costs.

Should the downsizing parents of adult children help them pay for a place of their own, however briefly? Rygiol thinks this is a plausible idea in some cases.

“If you can afford it, maybe give the kids the equivalent of six months' worth of rent for a modest apartment, plus the money to cover the security deposit,” he says.

-- Consider buying an inexpensive place where your offspring could live temporarily.

Clearly, many parents are money-strapped as they head toward retirement, which is the reason they must downsize. They need to take what equity they have in their big home and use those funds to buy their smaller place. Because of this need, they don’t have extra discretionary cash.

But retiring parents who have ample funds might consider purchasing a small investment property where their offspring can live for a limited period until they’re on their feet financially, says Donna Goings, a Virginia real estate broker affiliated with the Residential Real Estate Council (crs.com).

She recommends that anyone considering this plan make sure their offspring know the property is for their short-term use only and will likely be converted to a rental property in a few years.

Interested in the idea? Then search for a place that should be easily rentable in the future, perhaps because it’s located near a university where student housing is always in demand or because it’s situated in a popular resort community.

“Alternatively, you might buy your son or daughter an inexpensive duplex. They can live in one side and rent out the other for income to help support themselves for the short term,” Goings says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)

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Tips for Prospective Buyers

Smart Moves by by Ellen James Martin
by Ellen James Martin
Smart Moves | January 2nd, 2019

A couple in their early 30s have been renting a house in a charming historical neighborhood for several years. They’d love to buy a place up the street. But they fear that if the economy slides, their jobs might be at risk.

Fred Meyer, a longtime real estate broker and consumer advocate, says the couple in this true story are typical millennials in their views on home buying. They’re finally ready to own, and imagine their wedding in the backyard of the place they hope to buy. Yet they still have vivid memories of family members who lost homes to foreclosure after the last housing downturn a decade ago.

Should this couple buy or just keep renting? Meyer encourages them to make a purchase, assuming they’re in good standing at their places of work.

“For most young adults with salaried positions who are ready to settle down, buying a home is a much better alternative than renting indefinitely. You’re probably sick of paying rent. But you don’t want to set your course based on some economic forecast that could be all wrong,” he says.

Through the years, Meyer says he’s heard from a number of friends and acquaintances whose excessive caution kept them from buying a place when real estate was more affordable.

Of course, there are some employment situations which don’t lend themselves to financial stability.

Here are a few pointers for prospective first-time home buyers:

-- Make a sober assessment of your job stability.

Victor Hess, a veteran financial planner affiliated with the National Association of Personal Financial Advisors (napfa.org), urges those planning to buy a first home to take into account their level of employment certainty before making any final decisions.

“Jobs aren’t permanent anymore, so it’s smart to play it safe with all major financial decisions, including buying a house,” Hess says.

Nor should government workers become overconfident about keeping their jobs, he says.

“Government jobs -- whether at the local, state or federal level -- are still somewhat more stable than are corporate jobs. However, due to our changing economy, you can expect more job cuts in this sector, too,” according to Hess.

Your overall income stability depends on the demand for your skills and how sharp you’ve kept those skills, he says.

Hess, who’s both a CPA and a financial planner, generally advises his home-buying clients to spend no more than one-third of their gross household income on mortgage payments. But he allows that this rule of thumb may not apply to those who have set aside the equivalent of at least six months' worth of income in their savings accounts.

“You need to build a financial cushion to protect you if a job you’re counting on is lost,” Hess says.

-- Don’t depend on a mortgage lender’s word as to what you can afford.

Many would-be homebuyers emerge from their lenders’ offices preapproved to borrow more than they’d expected.

But should you rely solely on your lenders’ advice when deciding how much you can afford for mortgage payments on a home? Absolutely not, Hess says.

“Since they work on commissions, mortgage lenders are motivated to push you to the highest borrowing limit they can,” Hess contends.

Also, lenders may not take into account outlays you face on a regular basis. Would your lender know, for instance, that you’ve pledged large annual donations to your church or synagogue? Probably not.

-- Look to a neutral adviser for planning help.

Financial planners and tax accountants are generally not in a position to judge your job stability. But many can provide perspective on the potential cash flow implications of your home-buying plans.

“We can’t give you any guarantees. But we can give you guidance and insights,” Hess says.

Before you set out to shop for a home, he suggests you talk over the matter with a trusted financial adviser who charges by the hour.

“I can’t imagine this taking more than two to three hours,” Hess says.

The financial adviser you choose should be able to calculate the tax benefits available to you through your mortgage interest deductions.

“It’s not uncommon for people to overestimate these benefits when they’re buying a home,” he says.

-- Be especially cautious if you’re moving to a new city.

Making a long-distance move for work reasons always comes with a degree of uncertainty. Will you like both the new area and the new job? And will the new employer want to keep you on?

Until some of these questions can be answered, Hess suggests you consider taking a rental unit for a few months rather than buying a home immediately. That way you reduce the risk that you’d have to resell the place quickly and at a possible loss.

“I’m a huge believer that homeownership is the right choice. Usually, renting doesn’t make financial sense. But when you’re relocating for a job -- and there’s some doubt that your new situation will work out -- you may want to wait for six months to a year before buying that fancy house,” he says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)

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Tips for Young Single Buyers in the New Year

Smart Moves by by Ellen James Martin
by Ellen James Martin
Smart Moves | December 26th, 2018

A single woman of 29 definitely plans to buy a city condo one day. But first she intends to get her career moving, travel abroad and pay back her nearly $200,000 in student debt.

Ashley Dixon, a certified financial planner for an advisory firm focused on millennial clients, isn’t surprised by the young woman’s intentions. Many of her clients in the same age group share her sentiments.

“Single millennials would still like to have that ‘forever home.’ But first they want to put all the loose pieces of their life together,” says Dixon, who’s affiliated with Gen Y Planning, an advisory firm focused on clients in their 20s and 30s.

Although many young adults delay a home purchase, she insists they’re just as motivated as their parents were to own -- particularly once they commit to a job and metro area they like. Research from the National Association of Realtors (www.realtor.org) indicates that many millennials aspire to own property as soon as they’re financially able.

Moreover, the association reports that the share of overall home sales involving first-time buyers is gradually increasing. In November, it rose to 33 percent, compared with 31 percent during the same month in 2017.

Dixon advises her single clients to be even more conservative than married purchasers with dual incomes. That’s because singles rarely have a second income to fall back on if they can’t meet their mortgage payments.

Here are a few pointers for single buyers:

-- Avoid maxing out on your mortgage.

Among homeowners who faced foreclosure during the downturn were many who used an adjustable-rate mortgage (ARM). At the introductory “teaser rate,” they were comfortable handling the payments on their home loan. But once their ARM adjusted upward, they were in trouble.

Merrill Ottwein, a real estate broker who specializes in relocations, says many past problems with ARMs were the fault of lenders who failed to fully explain all the terms involved. But in other cases, borrowers were to blame for overextending themselves. Either way, he says numerous owners might have avoided foreclosure had they simply taken a traditional fixed-rate mortgage.

“All ARMs introduce an element of risk. That’s why I never recommend taking one,” says Ottwein, a former president of the National Association of Exclusive Buyer Agents (www.naeba.org).

-- Consider a property a roommate might share.

You may be one of those young singles who longs to finally be free of roommates. Even so, Ottwein says it might still be wise to choose a property suitable for a rent-paying roommate, just in case.

“Just knowing you have the right sort of house to share can relieve a lot of homeowner anxiety,” he says.

Single buyers who wish to keep open the option of having a roommate should make sure they choose a property with an extra bedroom and at least two bathrooms.

“Location and floor plan are the key factors that determine if having a roommate is a realistic idea,” Ottwein says.

-- Look for energy efficiency in the place you buy.

Margaret Smith, a certified financial adviser who works on a fee-only basis, says that many young singles are unpleasantly surprised by the size of their utility bills in their new homes. But she says more young purchasers are now beginning to shop for energy-efficient housing -- the same way they’re choosing gas-saving vehicles.

To estimate the energy costs of a property, she recommends buyers ask the current owners for copies of their utility bills, ideally going back two years or more. Then factor in annual cost increases.

To educate yourself on the topic of energy-efficient housing, Ottwein suggests you go to the internet. One website he recommends for this purpose, energystar.gov, is sponsored by the U.S. Department of Energy, along with the U.S. Environmental Protection Agency.

Also, he recommends you ask your home inspector to assess the energy efficiency of any property you might buy. Have the inspector check for energy-efficient windows, as well as insulation throughout the home.

-- Keep your friends in mind when choosing a home.

If you’re like most singles, having a vibrant social life is a top priority. Smith says you don’t have to live in the same neighborhood as friends to stay in close touch. But you won’t want to locate yourself so far away that your only regular contact is through social media.

“There’s little worse than buying a home where you’re stuck out in the middle of nowhere, stranded from your network of friends,” she says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)

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