1. I’ve decided to sell my home. Should I rent or
should I buy another home?
Whether maturing sellers should rent or buy their next home is not only an
emotional decision, but also largely a question of economics. The most important
financial factor that comes into play is determining the highest and best use of the
cash you receive from selling your home. Many times, tying up a lot of cash as
equity in a home does not provide the best cash flow.
The question to ask yourself is: Do I have sufficient cash flow from other sources
such that using the equity from my current home to buy my next home will be an
acceptable financial decision? If the equity in your current home represents a
substantial portion of your assets, how you use these funds is very important in
determining your quality of life.
To understand how this works, consider what maybe called the “Cheap Living
Myth." One of the most commonly uttered phrases by senior homeowners is,
"Our mortgage is paid off, so it's really cheaper for us to keep living in our home
than it would be for us to rent a home." Most seniors honestly don't know that
they might be able to rent an equally nice home in the same neighborhood and
pocket thousands of dollars in extra cash every year.
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2. Is there a simple rule of thumb I can use to decide
whether I should buy or rent my next home?
Advanced courses in real estate economics use a “two-thirds/one-third” rule. The
first two-thirds of most people's lives are spent acquiring and leveraging assets
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while the last one third of most people's lives is spent earning income (i.e.,
generating cash flow) from those previously acquired and leveraged assets. So,
people who used to figure they would live to be 60, 65 or maybe 70 years old
would acquire and leverage assets until they were 45 years old. Then, from that
time forward, they would try to generate income from those assets. People who,
today, figure they will live to be 90 years old, say, could be acquiring and
leveraging assets until they are 55 or 60 years old. After that, they can start
buying income property that generates cash flow. It may not be prudent for
someone who is 75 years old or older to purchase additional property unless it's
located in some type of assisted care living situation.
3. I’m planning to move into my vacation home.
Is this a good idea?
Maybe. It's important to make a careful and considered decision about where you
want to live at any time in your life. You should select an area where you feel
comfortable and secure and that you have had ample time to visit.
Many people make a quick decision to sell their home and move into a previously
purchased second home (i.e. a vacation place in the mountains, the desert, or a ski
resort). However, there is a big difference between living somewhere for a couple
of weeks each year and living there year-round. Many times, people don't know
what the place is really like. Also, those few weeks each year are usually during
the height of the social or recreational season and may not reflect year-round
activities. For example, many people decide to move to a desert community
without ever having visited that locale in the middle of the summer when the
temperature can reach 120 degrees.
People who are considering moving to their second home on a year-round basis
should live in that home for an extended period of time before making this a
permanent decision and certainly before selling their primary residence.
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4. Should I consider relocating to another state?
Younger seniors generally are more flexible and enthusiastic about relocating to a
brand-new distant community, while older seniors tend to be more inclined to stay
in a familiar community. Seniors also tend to relocate to be closer to trusted
family members. That usually means moving to wherever their children or
grandchildren have decided to live or returning to a hometown they themselves
left behind years earlier. Many seniors moved to sunny retirement-friendly states
(e.g., Florida, Arizona and California) a generation ago, when they were in their
late '50s or early '60s. These seniors are now living much longer than they had
expected and are facing more difficult housing decisions.
Another consideration is whether you will be comfortable making a long-distance
move, which involves more complicated logistics, then a short-distance move
does. Approximately 30 percent of seniors have lived in the same home for 30
years or longer. It's no wonder that making a major move with a lot of
accumulated belongings seems daunting. If you decide to make a long-distance
move, be sure to spend a lot of time in your destination state and at various times
of the year, if possible, before making your decision. You may want to rent a
home in your new community before you decide to buy a home.
Whether you’re moving a long distance or a short ways away, start packing for
your move as early as possible. Choose a reputable moving company, sign a
moving services contract and consider purchasing additional mover's insurance.
5. How can I be assured that my next home won’t
be a “money pit”?
If you are buying an existing resale home (i.e. not a brand-new home), it’s
important to obtain as much protection as possible. Talk to a REALTOR® who
specializes in helping seniors and who understands senior issues. This is a good
step toward learning about all the options available to you.
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One such option is to make sure the property is thoroughly inspected by a
competent building contractor or home inspector (your choice) prior to signing off
on your contingencies. Another option is to make sure your written purchase
agreement includes all the legally permissible warranties from the seller
guaranteeing the condition of the property.
You may, if required in your state, want to obtain a professional termite report
from a pest control company. If the seller agrees to pay for the home condition
and termite inspections, you’ll still need to feel assured that these reports are
competently, professionally and thoroughly prepared.
Many real estate professionals recommend the purchase of a home warranty
product. For example, American Home Shield Warranty and other companies
provide warranties with certain special benefits for seniors. A warranty means
you’ll have to pay only a maximum fee — for any type of repair covered by the
warranty program. These products give you the opportunity to ensure the quality
of your next home. A REALTOR® with the Seniors Real Estate Specialist®
(SRES) designation can tell you about other quality-assurance opportunities.
Remember: Everything in a real estate transaction should be in writing. Any
promises that aren’t written are not promises at all with regard to the quality or
condition of the home.
6. How can I be sure I won’t lose money on my
new home?
There is no guarantee that any particular home will appreciate in value; however,
residential real estate has historically proven to be an excellent long-term
investment. Keep these strategies in mind to choose a home that will pay off over
the years:
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♦ Purchase a home in a well-established neighborhood with good
schools, a low crime rate, and easy access to transportation and
attractive shopping areas.
♦ Purchase an undervalued home, or one that is unpopular at the moment
due to its architectural style or specific location within the wellestablished
neighborhood.
♦ Avoid over-paying for a home just because it has a strong emotional
appeal to you. Paying too much in the first place means your home
will be worth less than you paid for it on the day you move in.
7. Should I pay cash for my next home or obtain
a mortgage?
If you’re buying a home in an unfamiliar area, you should probably take
advantage of the financial leverage of a mortgage. That way, you can check out
the area more thoroughly before tying up a lot of cash in your home. Leverage is
important because if you bought a home for $250,000, for example, and made a
down payment of only $50,000 or $60,000, you wouldn’t have all your cash tied
up in the home. You would have to make mortgage payments for a while, but if
you didn’t enjoy the area and wanted to move, you would still have cash available
for that purpose. Of course, if you decided to stay put, you could pay off the
mortgage. (Make sure the mortgage doesn’t contain an onerous pre-payment
penalty, so you’ll be able to pay it off in full at any time.)
Another option is to bundle a reverse mortgage, which pays the homeowner a
portion of the equity in cash every month, into your home purchase mortgage.
With a reverse mortgage, you can buy a home for all cash, then get the cash back
in a lump sum or gradually over a period of many years. It’s less expensive to
obtain a reverse mortgage as part of the financing package than it is to obtain a
conventional mortgage first and then add a reserve mortgage sometime later. This
strategy is a positive way to buy a home outright but still produce bundling cash
flow.
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8. Should I put my money into other investments
instead of buying another home?
One good answer to this question is that you might well be able to buy a home
AND put money into another investment. Many seniors look at purchasing a
small multifamily building with two, three or four attached homes. (A two-home
building is called a “duplex” and a three-home building is called “triplex.”)
Instead of using the equity in your existing home to buy another home or a
condominium, you can buy a multiple-unit building, move into one of the units
and rent the others to tenants. The benefit is that you’ll be an owner and be able
to generate income from this investment. The point isn’t to buy a large apartment
building with 10 or 15 units that could bring on a lot of management and
maintenance responsibilities. Another advantage is that you could move from one
of the larger units in the building to a smaller one if you need less living space in
your later years.
If you finance part of the purchase with a mortgage, you can use the rental income
from the other units to pay some or maybe all of the monthly mortgage payments.
For example, suppose a couple in their early 50s sold their home for $250,000,
then bought a triplex for $350,000. If they applied the income from renting two
of the units to the $100,000 in mortgage debt, they might be able to repay it
within 15 years. That way, by the time they were in their 70s, they would own the
property free and clear and could keep the extra cash from the rents. If the two
units each rented for $800-$1,000 a month, that would bring in $1,600 to $2,000 a
month before operating expenses. In the event of a financial emergency, they
could refinance the mortgage or obtain a mortgage against the property with
relative ease.
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SUMMARY
The American Dream is to own your home. Over 80% of mature Americans over
75 still live in and own their properties. However, many of us, as we age, are not
able to maintain our homes. Some will choose to downsize to a condominium or
other maintenance-free dwelling. Others will decide to move to an active adult
community with recreational and social amenities. Still others will need to look at
assisted-care living facilities.
Today, when many Americans are living to 85-90+ years, we have until 60 before
converting to cash flow. What are you planning to do with your equity? Where
you live for the rest of your life is a major part of your retirement plan. Believe it
or not, many seniors could be better off renting and using their equity to develop
better and more effective retirement income.
Ask yourself or discuss it with your spouse: What is the highest and best use of
my current Equity? The security of homeownership is not to be denied but it
must make economic sense. Your Seniors Real Estate Specialist® will help you
to find the best housing for your specific needs.