How to downsize on your own land
Seniors are living in homes that are too big for their needs and more importantly, bigger than they want. This is a relatively new phenomenon because modern medicine and technology have made it possible for seniors to stay in their homes longer and multi-generational living has been declining for the past 50 years. Both of these factors have added an immense amount of stress to our housing market, which has not reacted quickly enough to the changing needs of American households.
Regardless of the state of housing, the important fact is that seniors and empty nesters are looking for opportunities to downsize, but they are limited because that need is relatively new. Construction companies favor bigger jobs that provide more predictable cash flows and are ultimately easier to project manage than several small projects occurring all at once.
Over the past 10 years, the West Coast has been experimenting with Accessory Dwelling Units (ADUs) and the results are in. ADUs have proven to be a boon for adding smaller square footage homes to our housing stock. The phenomenon has reached the East Coast.
Downsize, boost your income and help the housing crisis.
There is a young family in your community that would love to live in your home - the same home that is too large for you now, and a hassle for you to clean and maintain. With a backyard home (aka ADU) you could downsize right in your own backyard and rent your large house to that young family - creating a win-win for both households.
Or perhaps you have every intention of staying in your home for several more years, but would love an opportunity for additional income and reduce the load of increasing taxes and maintenance cost. You could build a backyard home and rent it out until you are ready to move into it.
How exactly does this work?
Step One: What Can You Build
Every backyard home project starts with figuring out what you can build and where. You’ll need to figure out things like the backyard home’s max size, set back requirements, coverage ratios, etc. You can read more about this in detail here.
Are you worried about privacy? That can easily be maintained with clever landscaping!
Privacy can be maintained with clever landscaping.
Step Two: Decide What to do With the Larger Home
Your old home is a HUGE asset and you can extract value from it in one of two ways after you’ve decided to downsize.
Rent it out:
Single-family home rentals are extremely hot and a home in good condition will be very easy to rent to a highly qualified tenant.
How much rent can you get? The rent depends on the city, neighborhood, and the size and condition of the home. In the high rent zip codes of Western Mass, you can expect at least $1500 for any detached home and as high as $4000 for large homes with high-end finishings. In Northampton, Amherst, and Easthampton the minimum rent for a 3-bedroom detached home is probably closer to $2,000.
Rules for Renting: Massachusetts is a tough state to be a landlord. However, owner-occupied two units, which is what this situation would be classified as, are exempt from Fair Housing Laws. This DOES NOT mean you should discriminate against tenants, but it does allow a homeowner to be as picky as they want to be with tenants without worrying about being sued for discrimination. This gives downsizing homeowners an edge in picking a good tenant and minimizes the risk of a bad situation.
Additionally, a lease agreement can be established that makes the tenant responsible for minor maintenance and repairs that do not require significant new materials to be purchased such as clogged plumbing. This can help the homeowner avoid becoming an on-call handyman.
If you are an elderly homeowner, you can even work out a “caretaker” agreement with the tenant to help you take care of the lawn, gardens and more complex maintenance or organizing contractors for bigger projects such as a leaky roof.
How to Prepare Your Home For Renters:
To minimize and even eliminate headaches as a landlord it will be important to complete all deferred maintenance that has built up over the years. It will also be valuable to update kitchens, bathrooms, and painting if they are dated to maximize your rent.
Not surprisingly there is financial assistance to help you do this. HUD provides lowering income households $25,000 forgivable loans to help renovate old houses. If the homeowner continues to live on the property the $25,000 does not need to be paid back. If they move or sell the property sooner a prorated amount must be paid back.
Condoization and Sell it:
Would you prefer to forgo the monthly income to be the president of a 2-unit condo association? In towns like Amherst, Northampton, and Easthampton where the price per square foot of homes is astronomical, it is feasible and likely profitable to convert your property into a 2-unit condo.
The new backyard home would be the 1st condo and the larger primary home would be the 2nd condo. This allows the backyard home and primary home to be sold independently. After condoization, the homeowner could downsize into the backyard home then sell their larger primary home and pocket the cash. The property and two condos would then be subject to the rules you set in the condo agreement. Cool, huh?
Step Three: Finance the Project
Regardless of how you will use the primary home after you have moved out, your financing options will be the same. You can read about them in this post.
However, depending on your plans there are unique considerations.
Loans to Maximize Cash Flow:
Reverse Mortgage: A reverse mortgage can be used to fund your project and it does not need to be repaid until you no longer live on the property. A reverse mortgage is slightly more expensive than traditional home refinancing, but if keeping all of the rental income will have a big impact on your quality of life, this option gets close to a “no brainer”.
Cash-Out Refinancing: If you have equity in your home, a cash-out re-fi will provide project funds with the lowest monthly payment and at the lowest cost.
Home Loan Modification Program: Massachusetts provides homeowners $50,000 at 0% interest that doesn’t need to be repaid until a home is sold. If you are an elderly homeowner trying to age in place or have a disability that makes living in your current home difficult YOU SHOULD definitely apply for this money. To get technical, the time value of money and average inflation will slowly devalue this initial $50,000. Twenty years from now, today’s $50,000 may only be worth $25,000. The devaluation makes you richer over time without doing anything :)
Special consideration if you are renting your big house:
If you are renting out the primary home you need to consider cash flows against your debt service. Regardless of whether a tenant is paying rent, you will be required to make your mortgage payments and should plan accordingly. This means maintaining a slush fund of at least 6 months of rent so you do not need to worry about the tenant not paying or leaving the home vacant. Property owners that do not have this slush fund are the ones who think being a landlord is stressful. If you have ample cash on hand, tenant issues are just a function of writing a check, leaving an apartment vacant or waiting out a lease. Minus a lawsuit for negligence on your part, it is very unlikely that these checks will make renting your larger home unprofitable.
Special consideration if you are Condoizing:
Unfortunately, it is unlikely that banks will provide retail construction financing based on the idea of condoization. The concept is too new and retail lenders must abide by strict underwriting guidelines. You will need to use cash, a home equity line of credit (HELOC), or cash-out refinancing. The two loan options mentioned above will not lend based on the condoization plan, but they will lend based on the property becoming a single family property with an ADU. Depending on the price per square foot of homes in your town the bank’s valuation may or may not allow you to borrow the full cost of the project. The shortfall would need to be made up with a personal loan or cash.
After you’ve sold the condo, some of the sale proceeds will need to be used to pay down the mortgage. If desired, the bank will likely let you maintain a mortgage based secured against the value of the new backyard home condo.
As you can see, there are many options for creating new opportunities that will better serve your future and benefit your community as well.