Parent’s Empty House: Sell It or Rent It Out?

Question: My mother, who is 74 years old, is in an assisted living residence. She was diagnosed with Alzheimer’s about four years ago. We are concerned about her financial situation because the facility costs about $4,500 a month. So far, we have depleted about $250,000 of her retirement funds and are trying to figure out a way to maximize the rest of her money. We want her to continue to live in this residence, which she enjoys very much. She has about $200,000 left in a money market account.

Her house is worth about $300,000. It is currently unoccupied because we had it renovated, thinking that it could provide a rental income to help reduce the cost of her care. The house is now finished and ready to be rented. Lately, we have been thinking that it might be a better idea to sell the house and invest the returns more aggressively in mutual funds.

The house would rent for about $1,500 a month, but with real estate taxes and property management fees we may end up with a profit of $1,000 a month.

What do you think we should do to maximize the funds available to her? Rent the house out until she depletes her remaining funds in the money market account, then sell the house and use the proceeds to continue financing her care? Or sell the house now and invest in mutual funds?

Answer: There’s no easy solution.

Neither the stock market nor home rentals have anything close to a guaranteed return. So, in either case, you’re hoping that the return will keep up with your mother’s cost of care.

If you keep the house, the tax on the income generated from it is likely to be less. Here’s one scenario, although you should discuss this situation with a tax advisor to put real numbers into the discussion.

If you sell the house, you’re likely to generate a taxable gain. Let’s assume that the investment in the house is $100,000, including the purchase price and the cost of the renovations. So, if you sold it for $300,000, you’d be paying tax on a $200,000 gain. At a 15% rate, your tax would be $30,000, leaving you with $270,000 to invest.

You could earn about 5.25% in today’s market on bank certificates of deposit. A nest egg that size would generate $14,175 a year, or $1,181 a month.

Although some of that amount might be eaten away by income taxes, the return approximates the return you expect to get from renting the house -- and CDs are a lot lower-maintenance than tenants.

Even with this income, you need to be monitoring what kind state and federal benefits are available to help pay for your mother’s care. Talk to your local office on aging. You can usually find it through AARP, or listed under government services in the phone book. The aging office can tell you about social services that might help defray some costs, either now or in the future.

Figuring Out How Much Life Insurance You Need

Q: We are expecting our first child this August. For the first time in our lives, life insurance is something to think about.

I believe we have done a good job planning for retirement -- thanks in no small part to reading books and newspaper columns such as your own -- but I can find no good books about how to estimate the proper level of life insurance.

Rules of thumb, such as buying a policy worth four to 10 times your income, do not strike me as the proper way to plan for the protection of our child. Do you have any thoughts on the correct methodology or books that can help us determine the right amount of life insurance for my wife and me?

A: I wrote a series of stories a few years ago on life insurance that is still posted on The Times website, www.latimes.com. One of those addressed the question of how much to buy.

Here’s the short version: You buy life insurance to replace your income in the event that you die when others are relying on you for support. To approximate how much you need, you have to go through a what-if scenario -- and understand that you are not dealing with an exact science.

Questions to consider: What if I die tomorrow? How would my spouse pay the mortgage? If she’s working, or could work but now cares for the children, what would it cost to get adequate day care? How long would my dependents need support? What assets, besides life insurance, could they draw on, and how far would those other assets take them?

This doomsday imagining should help you come up with an estimated amount that your monthly budget would fall short and for how long.

From there, my simple rule of thumb is to multiply that amount by 240. That’s what will come up with the lump sum necessary to provide the required monthly income, assuming that your dependents will earn 5% annually on that nest egg and won’t spend down the principal.

So, if the dependents needed, say, $1,500 a month, you’d need a term life insurance policy of $360,000. If they needed $4,500 a month, you’d need about $1 million in insurance.

A final note: round up -- liberally. Term life insurance is cheap, particularly when you are young and healthy. (Conveniently, that’s when you need it the most.) A recent check found that a healthy 35-year-old could buy a $1 million 10-year level-premium term policy for about $500 a year.

Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.