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A Guide to Real Estate Investments as You Near Retirement

A Guide to Real Estate Investments as You Near Retirement
Lisa McKown/Dreamstime

By Thursday, 29 October 2020 06:13 PM Current | Bio | Archive

Is it wise to invest in real estate in retirement? This is a common question for people who are preparing for retirement, and it's becoming even more topical during the COVID-19 pandemic. Increasing unemployment has caused many people to rethink their retirement plans, and mortgage rates are hovering at historic lows — making refinancing or buying a new home attractive options to consider.

These circumstances could make real estate a prudent investment choice for many people in retirement, but there's a lot to consider before moving forward. Here's how to weigh the pros and cons of buying real estate in retirement.

Benefits of investing in real estate for retirement

Retirement savings options that have benefits designed to boost your finances, like a 401(k) match, are always a preferable choice when planning for retirement. But chances are you'll have additional savings that you want to put to work in retirement. Here's where real estate could come into play. What typically draws people to invest in real estate during retirement? Here are some advantages.

1. Earn rental income

If you are looking for an extra monthly boost to your income in retirement, renting a property could be the answer. You have a few options when it comes to earning money from your real estate investment. You could invest in a second home or commercial real estate, neither of which should disrupt your current living situation.

Or, you could purchase a home with an extra suite or extra rooms available so you can live in the home while renting a portion of it. If the suite is separate, you might feel comfortable renting this to long-term tenants. Alternatively, you could opt for short-term rentals, which are growing in popularity for seniors. Airbnb reported in 2018 that 400,000 seniors were hosting on the platform.

2. Simplify your retirement plan

Investing in the stock market can get complicated, so most people rely on stockbrokers to weigh complex choices and invest for them. Yet as retirees age, it's common to look for ways to simplify financial decisions. Doing so can help keep a retiree in control of their finances longer, which is particularly important — considering elder financial abuse costs Americans anywhere from $2.9 billion to $36.5 billion annually.

If you prefer a simpler approach to investing in retirement, real estate could offer a solution. It can be easier for some people to understand how physical assets earn a return. Even though upkeeping a property can have its complications, these challenges are typically familiar to retirees who have owned homes throughout their working years.

3. Tax advantages

In some cases, owning a property can have considerable tax advantages. At a basic level, you're able to write off the costs of renting your property and depreciation. And depending on your financial situation and location, you might qualify for government incentives meant to help you upgrade your property.

Don't forget about the mortgage interest deduction on your personal taxes. Plus, you could avoid capital gains tax when it comes time to sell the house. If you've lived there for two of the preceding five years, you could avoid tax on profits up to $250,000 ($500,000 for joint filers).

Risks to weigh

Investing in real estate in retirement isn't entirely risk-free. Here are some negative outcomes you definitely have to weigh before jumping in.

1. Increased work

Owning a home can be a lot of work, and unexpected expenses do arise. Becoming a landlord can also be unpredictable; having bad tenants or no tenants for several months are both costly scenarios. If you don't want to take an active role in managing your home, or if health reasons prohibit it, then real estate investing might not be the best strategy for you.

2. No guaranteed return

Unlike a guaranteed investment, such as a bond, it isn't a surefire bet that your property will rise in value. While most people expect their home to appreciate at a rate at least equal to inflation, there's always a chance that property values will decline. If you have 25 years to wait, a dip in the housing market might not be a huge concern, but if you hope to earn a return in the short term, owning a home becomes a bigger risk.

There's also no guarantee you'll be able to rent your property. Having an empty unit for several months could be financially devastating, especially if you have debts on top of your mortgage to pay. Statistics show adults born between 1949 and 1954 have an average of $22,951 in non-mortgage debt.

3. Limited flexibility

If your finances change and you need to access funds quickly, doing so could be difficult if they're invested in a property. You'll have to either take out a home equity loan or sell the property, both of which could take longer than tapping liquid investments. If you're considering buying a home in retirement, then you should also have some investments with high liquidity, such as a high-interest savings account, certificates of deposit, stocks, mutual funds or bonds.

How to afford property in retirement

Once you've weighed the advantages and disadvantages of buying real estate in retirement, it's time to create a strategy for moving forward. With the federal funds rate forecasted to remain low until 2023, thus helping to keep mortgage rates low, many prospective homeowners are considering getting a new mortgage or refinancing their current loans.

If you already own a home and want to buy a second home as a retirement investment, refinancing your current mortgage could be a savvy strategy, especially if you're in one of the top cities where refinancing borrowers save the most in lifetime payments. In Boston, for example, borrowers can save $27,277 over the lifetime of their mortgage by refinancing. But consider the pros and cons of refinancing in retirement.

Pros of refinancing your mortgage

  • Reduce your current monthly bills. If you're trying to save for a second down payment, then reducing your current bills by refinancing your mortgage at a lower rate could help you find some extra room in your budget, helping you grow your savings faster.
  • Get cash now. If you want extra cash on hand to purchase a second property or make upgrades to your current property, you could consider cash-out refinancing. In this scenario, you'd get a new mortgage for more than you currently owe on your home and take home the difference in cash.
  • Get a shorter term. For homeowners who want to own their property outright heading into retirement, refinancing now to get a shorter term could make that happen sooner. Although your monthly payments will be higher, you could substantially cut interest costs.

Cons of refinancing your mortgage

Refinancing isn't the right choice for everyone looking to buy a property in retirement. Here are some of the disadvantages.

  • You take on long-term debt. Many borrowers like to extend their term when they refinance, so they can lower their monthly payments. Retirees who do this could be locking themselves into mortgage payments for the rest of their lives. There's also a chance you might not outlive your extended mortgage, which could leave your heirs with difficulties when it comes to settling your estate.
  • You might decide to move. Many mortgages aren't portable, which means you can't take them with you if you decide to downsize or move to a different location. Many retirees decide to do this to be closer to family or live in a more desirable climate. You could end up paying a penalty if you sell your home and repay your entire mortgage early.
  • Can you afford the payments? While refinancing your home to get a shorter term might appeal to you theoretically, you could get yourself into financial trouble if you don't have enough money to continue making the higher monthly payments until the end of the loan. Before doing this, consider how much longer you intend to work and if any fixed income you have heading into retirement will still be enough to pay your mortgage at the increased monthly rate.

Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.

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Is it wise to invest in real estate in retirement? This is a common question for people who are preparing for retirement, and it's becoming even more topical during the COVID-19 pandemic. Increasing unemployment has caused many people to rethink their retirement plans, and...
real estate, invesmtent, retirement, home, mortgage
Thursday, 29 October 2020 06:13 PM
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