The lure of land and, perhaps more to the point, the returns that real estate has offered over the last several years are enticing boomers who want to bring diversity to an investment portfolio by buying a second home.
One illustration of those returns is the dramatic growth of the median sales price of existing single-family homes in metropolitan areas. The median price climbed to an estimated $188,500 in third quarter 2004 compared with $147,800 in 2001, a 27.5% increase, says the National Association of Realtors, Washington.
Boomers may be taking note, according to NAR data, because the median age of second-home buyers is 50, right in the heart of the boomer age range.
But real estate experts suggest care prior to acquiring a second property as an investment, particularly given the exuberance real estate has exhibited over the last several years.
In at least one case, the advice is to wait until the bubble bursts and the market crashes and then buy low. “It is hard not joining the party,” says Carl Haacke, author of a book titled “Frenzy: Bubbles, Bust and How To Come Out Ahead,” and a former economic policy advisor with the White House National Economic Council during the Clinton administration. “There is much more pressure to jump in.”
That pressure is both emotional and pragmatic, he explains. A boomer may want to run with the crowd and also may be concerned that “if you dont own it now, you might not be able to afford it next year.”
That pressure, he continues, is also felt by investment advisors whose clients want competitive returns and, consequently, might be inclined to “jump in even if there is a bubble and they know there is a bubble.”
Advisors, says Haacke, need to “adhere to a personal discipline and the realization that people might not stay with you. Its hard.”
Boomers also should consider whether it is a longtime retirement investment, he adds, and if the property does not need to be purchased immediately, then “they have time” to wait for a market adjustment.
If a boomer is viewing a real estate purchase as strictly an investment decision, then a good starting principle is “as soon as you love it, dont buy it,” says Hugh Bromma, CEO of Entrust Administration Inc., Oakland, Calif., a third-party administrator for tax-deferred and tax-free retirement plans, and author of “How to Invest in Real Estate & Pay Little or No Taxes.”
Bromma says, “As soon as I dont see cash flow, then I sell out to someone who thinks they can generate it.” In general, he likes to see a 6-8% flow that covers the cost of funds and offers a profit.
If a boomer gets a mortgage, Bromma advises using a fixed rather than an adjustable-rate or a variable rate mortgage if the investment strategy is to buy and hold or a boomer plans to live in the house. If the boomer plans to pay off the mortgage aggressively or resell in a few years, then an ARM might be more appropriate, he explains.
“Im a big believer in kicking the tires,” he says, noting that he advises performing due diligence on any potential acquisition. For instance, he says that if a potential purchase is outside of the U.S., then there are differences that range from tax treatment to terminology.
For instance, a purchaser cannot use a 1031 exchange for property purchased outside the U.S., he says.
Section 1031 of the Internal Revenue Code allows property to qualify for tax deferral if a “like-kind” replacement property is found within 45 days of the sale of the relinquished property and the closing on the replacement property takes place within 180 days after the replacement property is identified, Bromma writes in his book. But a relinquished property cannot include a home or a foreign property unless it is included in condemned property, he writes.
There are other differences. For instance, in countries like Austria, “you get the four walls” but not fixtures such as lighting or bathroom amenities, he adds.
Because of these differences, Bromma recommends working with a professional with knowledge of a particular country before purchasing property in that country.
And whether the purchase is domestic or foreign, he stresses the need for diversity. Do not concentrate purchases in one area or concentrate all ones assets on a real estate property, Bromma says. “If you are counting every penny, you shouldnt be buying.”
Real estate can offer a boomer a greater control over an investment because it can be used personally and to generate rental revenue, says Paul Purcell, a partner with Braddock + Purcell, New York, and the former president of Douglas Elliman, New York.
Boomers should decide what about a property is important before making a purchase, he says. Do they want a property that is accessible and a drive away on a weekend? If they buy a property on the shore, can they rent it during the summer and enjoy it during the shoulder months?
Pragmatic considerations may include accessibility to an airport and good medical facilities, he says, and boomers may want to consider how close theyd like to be to their children.
Purcell advises potential buyers to purchase the best property they can afford but to “ask themselves if they can afford it.”
He also suggests renting in an area before making a purchase if the area is far away or unfamiliar.
In general, Purcell recommends that boomers learn as much as they can prior to a purchase. “Ask questions, questions, questions.”
Reproduced from National Underwriter Edition, February 25, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.