Dear David,
We have raised two children in our family home and plan to sell it in a year, when we retire. One of our children owns a large property and we are considering funding the construction of a granny flat there. Our plan would be to live in the granny flat half the time, and travel for the remainder of the year. Do you think this is a good investment? – FAMILY MINDED
DEAR FAMILY: It sounds like you’ve started to plan your retirement lifestyle at the perfect time. Between building permit approvals and the drafting of plans, the preparation it takes to build a new home can eat up the better part of a year.
This is the time to surround yourself with professionals, so make a checklist of people to connect with. The first person to call is your financial advisor, who can help you take stock of your long-term financial goals. You’ll also want to talk to your contractor, who can ensure the granny flat proposal is viable from a zoning perspective.
Your plan to fund the granny flat raises a few red flags for me, which have more to do with estate planning than the construction process. Estate planning can get complicated with so much equity tied up in one child’s home. If the granny flat lifestyle doesn’t work out, or if someone’s life circumstances change, your exit plan may be challenging. When you’re heavily invested in one child’s property, you may not have enough equity left to move if you need to, and in the event of your passing, there is no clear path for the disbursement of your estate. In order to leave an inheritance to both children, you’ll need to account for the portion of your equity that can’t be liquidated because it’s tied up in one child’s home. You’ll also need to assess what the value of that investment might be ten or fifteen years from now.
Your financial advisor can help you find a solution. Perhaps your child could take out a second mortgage to finance the addition to their property. You might consider co-signing a loan for them, rather than funding the project outright. You can then pay rent to live there, which should more than cover the additional mortgage payments.
On mortgage renewal, your child may be able to roll their two mortgages together, as the rental income will help them qualify for a larger mortgage. An arrangement like this lets you separate your piece of the financial pie in the event you or your child decide to move, or if your estate needs to be liquidated.
PRO TIP: As parents, we need to be thinking about estate and financial planning well ahead of retirement age. Planning ahead keeps our financial options open, and can avoid hurt feelings down the road. #Advice #AskDavid #TheNegotiator
David is a top-selling Broker in Kitchener-Waterloo Region. He works personally with you when selling or buying your home. Call or text today for your free home evaluation! 519-577-1212.
