Real estate savvy individuals approaching retirement may need to change some very fundamental thoughts about their housing strategy. While the purchase of well-located property is a priority during our younger years, the mantra during retirement is much different. According to a Forbes article, it changes from “location, location, location” to “cash flow, cash flow, cash flow.” (1)
Younger home buyers have a typical checklist of requirements. They need to find a home with a short commute to work, a good school district, and even though they may pay dearly for a great “location,” they must also look for appreciation potential. The strategy is usually based on a long-term commitment to allow for a rise in value, and a profit at a much later date.
But when it comes to retirement, that strategy is no longer relevant. Many retirees want to stay in the home they’ve been paying off for generations. It’s called “aging in place.” But, that can also make them “house poor” if most of their wealth is tied up in that home.
Aging in Place
According to a survey by the American College of Financial Services, 83% of the respondents said they want to live in their home for as long as they can. 60% were strongly in favor of that idea while 23 % said they were somewhat in favor of it.
They also said that if they were to move away, they’d like to continue “owning” their own home and to live independently. Only 5% said they would like to rent their homes during retirement.
At this point in their lives, some people may have to tweak their real estate strategy so they can afford to maintain the lifestyle they desire. Forbes published a great article on three ways to improve cash flow as a retiree.
Downsize for Cash Flow
First on the list, a reduction in monthly obligations by downsizing. The most obvious way to do that is to move to a smaller, less expensive home in the same area. Many family homes were purchased with enough space to raise a large family. Retirees don’t need all those extra bedrooms and play areas. They are better off trading “down” for a smaller less expensive home, reducing their monthly expense, and hopefully freeing up some cash with the exchange of a more expensive home for a less expensive one.
Another way to downsize is to move to a completely different location where you can buy a less expensive home, and pay less in taxes. According to U.S. News & World Report, there are 13 states that don’t tax your social security or your pension. That list includes: Alabama, Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming. Property taxes may vary in all of these states, along with sales tax. Be sure to check those as well.
Retiree Debt Management
Second on the list is debt management. Retirees with a mortgage may need to take a hard look at their monthly debt load, and reduce those mortgage payments, if possible. Some people try to pay off their homes before they retire. But, that’s not always possible, or wise.
Refinancing at a lower interest rate might be a better option, or to take out a new loan over a longer period of time. The goal is to increase the monthly cash flow.
Reverse Mortgage for Cash
The third suggestion is to get a reverse mortgage. This option lets people who are 62 years of age or older access the equity in their homes. The most popular one is called a Home Equity Conversion Mortgage or HECM, which is backed by the FHA. They allow a homeowner to borrow up to 57.5% of the equity in the home and use the home as collateral.
Borrowers can take the money in payments, a lump sum, or a line of credit. The loan is paid off with interest by selling the home when the borrower dies. If the home sells for more than is owed on the loan, the additional money goes to the heirs.
Reverse mortgages should be viewed with caution, because you are tapping into the equity in your home. But, they can be the right financial tool for some individuals (2).
Sell to Your Children
The website mortgageloan.com also mentioned a fourth option. You can sell your home to your children with a sales-leaseback option. The homeowner would use money from the sale to rent the home from the children. That children would then earn rental income, with all the tax benefits of owning rental property.
This podcast is just food for thought. Speak with a financial adviser, tax consultant, or real estate attorney about your particular situation.
(1) Forbes Article
(2) Reverse Mortgage: mortgageloan.com