Many clients dream of owning a second home when they retire. But reality bites.
Have your clients add up the total annual costs of the second home (mortgage payment, taxes, insurance, etc.). Then divide that amount by the number of days the would-be buyers plan to be there each year. If they produce a figure that is equal to or exceeds what they would pay to stay for a night at a luxurious resort or hotel, it may be more sensible to do just that.
There are more sensible ways to turn a client’s dream into a reality.
Rent, Then Own
The advantages of initially renting instead of buying are many. The clients can avoid both the large down payment and time-consuming mortgage application if they’re borrowing, and dodge an even bigger hit to their liquidity if they were considering paying in cash.
As renters, they’ll also avoid spending time and money on maintenance and upkeep. Instead, they can spend their days scouting the area for that perfect place to eventually purchase.
Consider a Condo
If they’re looking to buy in a desirable and developed geographic region, chances are there will be a burgeoning market of new and pre-owned condos from which to choose.
The advantages include having the lawn and snow removal taken care of by the condo association, as well as plenty of neighbors nearby to keep an eye on the place while the clients are away.
But the downsides are considerable. The cost per square foot will likely be higher than an individual house, and traditional financing terms may be more difficult to obtain. Condo associations often charge monthly maintenance fees, which typically move up over the long term.
Cost-conscious clients might be able to recoup some of their expenses by renting out their condo during a week or year that they aren’t using it.
But they first need to check whether the condo association or local zoning rules allow such an arrangement, and what restrictions might apply.
They then should contact a local property management company to find out how much it will cost to have them step in as landlords when the clients can’t. These people can also be a good source of information on local neighborhoods, current rates for rentals, and even properties for sale.
If renting is going to be a priority for this property, clients should also confirm that the corresponding insurance and lending arrangements allow it.
Borrow or Cash?
Once clients find their dream retirement home, they’ve got to figure out how to pay for it.
First, a cash purchase will by definition reduce the amount of non-retirement assets available for future investment use, for emergencies, and for big-ticket items.
Second, today’s low interest rate environment makes it possible to borrow cheaply and at a potentially tax-advantaged interest rate—especially if the clients can endure and qualify for a 30-year fixed-rate loan. Also, clients may actually pay much less by borrowing than if they were to liquidate retirement accounts because of the higher tax rates on withdrawals.
Imagine the Future
One set of questions the clients should answer before deciding on a retirement home is what their typical day will look like, both now and in the future.
Are friends and family going to be visiting often enough to warrant extra guest rooms? What type of healthcare is available in the area, and will the clients’ circumstances allow them to receive the care they need?
Will the clients be able to navigate through the house and neighborhood as they age, or will it become prohibitively difficult to get around as their eyes, ears, brains, and knees become less reliable?