Flag: Real Estate
Boomers on the cusp of retirement or beyond looking at soaring real estate values may realize just how sweet is home.
Capturing large home appreciation and renting, downsizing, or moving to a part of the country where living expenses are more modest may offer a way to stretch retirement dollars, advisors agree. But, they add, there are no pat answers and any discussion should cover both the financial and emotional impact on clients.
Since the first quarter of 2004 rental vacancies have ranged from 10% to 10.4%, according to the U.S. Census Bureau.
Even so, average rental costs vary nationwide and may affect the decision to sell and then rent.
Data from the Department of Housing and Urban Development appearing in late 2003, found the following rents for a two-bedroom apartment: Flagstaff, Ariz., $887; San Francisco, $1,775; Atlanta, Ga., $944; and, Chicago, $951.
“The best thing for all people, in general, is to look at it in the context of personal life needs,” says Keith Newcomb, a certified financial planner and wealth manager with Full Life Financial, LLP, Nashville, Tenn. The home is a center place of our lives, he continues, so the first question to ask is whether “current housing meets my needs.”
There is a tendency to want to “stay put,” according to Newcomb, and that may be a good thing because “speculation with a primary residence is not necessarily a good strategy. When you speculate with, what for many, is their single largest asset, it creates more risk.”
One measure of determining whether or not it is better to rent is to look at a home’s value and establish a P/E ratio, he says. And, if the P/E ratio is high, then the cost of renting needs to be compared, Newcomb says.
It is important that a client take a long-term strategy, if a decision is made to sell, he adds. Points to consider include whether equity in the house will outpace savings from the sale of a home and the eventual risk that rents will begin to catch up with the costs of maintaining a home, Newcomb says.
The issue often comes to the fore when there is a life change, he explains. Newcomb recounts a physician who sold his residence in New York City and moved to Waynesboro, Tenn. He decided to rent, according to Newcomb, because he believed that market appreciation would be “fairly stagnant” given the distance from amenities such as a movie theater. While the strategy can work if you move to an area where the cost of living is lower, if you stay in the same market, it may not work, he adds.
If someone is selling and going to buy again, Newcomb suggests that they consider the following:
==access to transportation hubs;
==a growing urban center 1-3 hours away;
==a new, growing urban center;
==commercial activity nearby (for instance, turning a farm into a shopping center.)
If a decision is made to buy rather than rent, Newcomb says, a net present value analysis has to be completed to determine whether it is better to pay in cash, take out a mortgage, decide on how long the mortgage should be, or decide on a combination of both cash and mortgage.
An advisor has to help a client determine whether it is worth paying $1 in mortgage payment to save 25-35 cents on that dollar, he adds. And, Newcomb continues, as the note amortizes, the deduction will go away. So, what might be a good plan in the first 5 years, might be a bad plan in the last 5 years of a mortgage, he continues.
And, an advisor must make sure that a client is not persuaded to take on more home than they can afford to own or to choose mortgage options that pose higher risks such as an interest only option without understanding those risks, he explains.
If a boomer is looking to downsize then it can be an opportunity to secure a client’s financial future, Newcomb says. For instance, some of the assets from the sale of a home can be redeployed to the purchase of long term care insurance, he says. This can be important, he adds, because although many boomers are freeing themselves of “ball-and-chain items” such as college costs and the cash flow looks great, 20 years down the road major health care expenses could impact cash flow.