Sell, Rent, or Borrow? Best Ways to Use Home Equity in Retirement
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- Опубликовано: 1 июн 2024
- Listener Ray is wondering what to do with his home as he embarks on a nomadic, van-life journey in retirement. Should he sell it to finance his travels or retain it for potential appreciation and cash flow?
James explores the nuances of home ownership as an asset versus an investment. He considers cash flow and leverage as he looks at Ray’s three options - sell, rent, or borrow - while emphasizing aligning financial decisions with personal goals and aspirations.
Questions Answered:
Why shouldn’t I consider my home an investment?
What are the key financial considerations for retirees when deciding whether to sell, rent them out, or explore other options?
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⏱Timestamps:⏱
0:00 - Ray’s question
1:56 - Why a home isn’t an investment
4:38 - Do you want to be a landlord?
8:22 - The financials
10:14 - Asset appreciation
11:30 - Cashflow
15:04 - Leverage
19:02 - What should Ray do?
20:33 - Reverse mortgage
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Wow!!
I could have wrote that question!
My name is Ray I am 65 years old I am in the exact same position.
Asking myself the exact same question.
I can't wait to see. Your answer
Me too!
One final consideration if Ray is going to travel fulltime is where is he going to maintain his permanent residency for car/van insurance purposes. There are mail services and domicile addresses, but they often cause problems with auto insurance. If the property tax is his only major expense, then maintaining the home as his residency for insurance purposes might be a consideration. The state taxes of his home state will also probably factor into his decision.
Ray, I also have a van and looking to do exactly the same.
You could consider making your home a long, mid or short term rental STR for tax advantages. As a long term property landlord for 30 years, it’s not that difficult once it is set up correctly. Alternatively, You can rent all or part of your home or bedrooms and get a tax advantage as well as have a home base when you need it as a STR. For When you retire, look into the qualifications for setting yourself up as a real estate professional status REPS for the STR. This way you won’t be focused on spending down your wealth but instead building a tax advantaged cash flow real estate business. There are lots of good resources online.
BTW, This advice also completely changed the way I look at retirement and funding my van life goals
Very timely topic for me. I’ve been considering this issue in my own life. Keep em coming, James!
A big thing is preventing squatters. It's a real thing and a pain in the ass to get rid of them!
Great topic... have met many people in these last 2 years who are unable to re-enter market after they sell. Prices have soared and there is likely no income documented any longer so difficult to obtain a loan and yet not enough cash to buy as a cash buyer.
Hi great comment! My husband and I are in this situation. We sold our home 3 years ago. First, we couldn't find anything that suited us and then the housing market went crazy in our area - bidding war galore! I sliced and diced our situation until my eyes got crossed-eyed. Our working plan is to purchase a home with no money down (VA Loan) and pay a mortgage until we die (??). We view it as no different than paying rent, which we are currently doing. Yes, we would be responsible for all costs to our home BUT as we get older we won't have landlord decisions hanging over our head or having to move every few years.
@helencousins2911
Buy something smaller maybe not in the best neighborhood and allow your equity to build up as you save for a better home that doesn't require a forever mortgage.
It will be two steps instead of one but better than saddling yourselves with an endless payment!
Also, baring a horrific ending, one of you is likely to survive the other and be left with all the financial responsibilities....
Very good info, James. I appreciate the depth.
What a timely video for me! Thanks for the clarity.
Love this video! We are selling our house! We looked at the numbers and figured we could make more money monthly on dividends from the sale amount than renting it, paying property taxes, maintenance, and insurance. Quality of life by traveling for us is key.
Your gain was likely tax-free as well!
Wow, nicely thorough content, as is typically the case here on your channel. Another possibility for the equity in your home since it is one of your assets, but one you actively use to live in… you can feel more confident planning to spend down your retirement money if you set aside your equity in the home to cover long term care at end life.
I could have written this question as well, minus the van life. Thanks so much James, would love more similar real estate focused content.
What a fantastic conversation. My wife and I also find ourselves in this position. I am retired and 59 years old. She will retire this year at 58 years old. We plan to travel full-time or near full-time in our early retirement, say 5 years. We are struggling with all aspects of deciding to keep the house and leave it empty, or keep the house and rent it, or sell the house and deal with re-housing ourselves when the travel years end. I feel like it's as much an emotional decision as it is purely financial.
We are near the same situation. We are selling. The value has almost doubled since we bought in 2018. We will downsize and rent in 3 years when daughter goes to college. It’s easy for us as we are ready to leave this area.
Thanks, it gave me another way to assess the option in just a few minutes.
First question should be have you ever been a landlord or full-timed in a van for >90 days? If not, is retirement really the time you want to fail at both?
Another great one!
I was going to sell my first home during downturn so decided to rent for a while. Glad I kept it. Paid it off before I retired.
Thank you! My husband and I are considering renting out our house and traveling for the first 1-2 years of retirement. It worked well for us when we were overseas for a year for work. So much to consider and everyone’s situation is certainly different.
sell it!
Great Video!
My home is worth HALF what I purchased it for 25 years ago. I tell people this often because too many people adopt the mindless assumption that housing values always go up, but nothing could be further from the truth. I live in a town that use to be an industrial haven, but every single one of those jobs is now gone and all that's left is a shell of a community that no one wants to move to. Now I'm approaching retirement with a house that needs many repairs, but isn't worth investing a dime on. This could happen to you and it is entirely out of your control, particularly if you are not in a position to move before the market tanks.
I bought a home in NJ ( 1990) for $145k..sold 8 years later for $144k ..plus, paid a realtor 7% ( going rate in 1998) & also put in a new roof.. house prices don't always go up
As in real estate location location location .
I hopefully will not have that issue being in California.
Also capped property tax another benefit.
You must admit, that yours is the exception to the rule.
Super video you covered the topic well, but don't forget potentially additional losses to real estate agent fees when house is sold. Actual net proceeds can be very disappointing.
Good video as I've just started to think about this topic. Sure lots to consider. Fortanately my house was a good investment as the value has increased 14% per year for 29 years. And if I sell, there are no taxes on the capital gain. Renting it out is risky in our city as it's difficult to find a good tenant who won't trash the place. For a worry free retirement it makes sense to sell and keep the proceeds in a money market fund. Then keep your eyes open during your travels to find a future spot you would enjoy living with reasonable home prices. Once you grow tired of van life, purchase a home in that favorite travel spot you found. So far thinking this as a first option.
I don't know what's going on with this platform (algos???). But every other one of your videos this past week feels personal (topics and questions in my "things to research list" Ha! Thanks!
James, if you were to buy a $600,000 for $100,000 down and borrowing the rest at nearly 7%, then your mortgage payment would be greater than the $3,000/mth that you are getting in rent. Ugh, I just don't see how folks do that great in real estate unless they time things just right.
I agree; that’s why I’m glad he says it’s not an investment.
For some it's lucky timing. for others it's just keeping it for a long time
The numbers need to work but they don’t at those interest rates, payments and rental rate.
James you should mention the REAL RATE of RETURN, i.e inflation adjusted return. That is the main thing that counts comparing to alternatives such as stock market, and we have to compare for volatility and TOTAL RETURN and also net real return after sale and taxes
Contrary to what people believe, a house is not an asset until you sell it and recoup your money, minus everything you put into it. It is a liability with the taxes, maintenance bills, etc….
As a 22-year RE investor, the 2 most important factors are 1) likelyhood of wanting to be and be good at being a landlord? Most hobby landlords get burned. And 2) Tax impact. How much gain will Ray be foregoing tax-free if he doesn't sell within 3 years? Avg Ray should sell.
Good video, covers key questions. Another question I'd like you to address is the best way to purchase a home for your children. I have a paid off home and am thinking of purchasing another property with a mortgage as a home for my son and treating it as a rental, having him pay me the mortgage and any improvements, tax, etc. on it. I think it is a situation many parents may be considering these days.
I’m surprised you don’t discuss if Ray is married, and doesn’t want to come back to the home, and has a significant gain in the property that he is giving up $500,000 in tax FREE capital gains by renting it out for more than 3 of the last 5 year instead of selling. That’s a huge tax incentive and selling sounds like a better plan. (He could always use some of the proceeds to buy a small investment property that may cash flow at some point and he can use the depreciation “losses” over the next 30 years to offset other types of income)
Plus, 1031 exchange that small investment property to defer tax on any gains and also goes to children at step up basis with no taxes due on those gains. Soooo many advantages to different types of real estate!!
$250K in tax free capital gains, he is single if he is living in a van down by the river.
Great video and I really appreciate your help in looking at different angle of such big decision... I will be in a very similar situations with Ray so it was especially interesting. One big factor that's in my consideration is the capital gain. My house has appreciated 3X as of now and I am single, so the capital gain tax will be heavy (and my kids don't want to move in). I have a living trust, and I hear that if I go first before the house sells, I hear and understand that my kids (trustees) can sell the house without owing any tax. If so I can have passive income by renting it out and my kids get the cash later. Do you have any take on that? Thank you, again I just recently found this channel and am really enjoying, you're very good in analyzing and explanting things.. although you don't look any older than a college student.. (this is a compliment) :)
Hi James, I liked this video and I have a related question. I am planning to move to another state with lower property taxes. NJ to NC for example. I am 61, my home is worth 600k no mortgage. Should I invest the proceeds 500k and get another mortgage. It sounds like that makes sense but would like your view. Renting the current is not something I am interested in.
In addition to your down payment you paid interest and upkeep and taxes so your return is less than mentioned on the leveraged example
Yep
Thanks for the great information you provide. I have a question though as to the death of a spouse and tax ramifications. My wife and I will be retiring in 10 years where my wife will be 68 and I will be 62. I have projected us having 1.2 million in pretax money and 700k in Roth money. My goal is to not enter the 22% tax bracket. My plan is to take social security when it becomes easiest for me to meet that goal and use my pretax IRA to bring our income just under 22%. The ROTH money will be added afterwards. I anticipate up to a 7% withdraw in retirement because we will be completely debt free and our home will probably worth a million when we decide to sell it for something smaller. As far as day to day expenses go social security could cover us even if we somehow ran through our entire retirement savings. My worry is RMDs and when either my wife or myself die. It is unlikely we will both die at the same time and the RMD for a single person is much different than that of a married couple. Do you have any advice as far as that goes?
I worry about big dips in market and not having enough years left to make up for it, especially if I’m not continuing to contribute. Feels like some real estate helps to keep you diversified.
If I pay off my mortgage today, I get an instant (and guaranteed!) 'cash flow' of not having to pay a monthly mortgage payment of at least 5%+. This is not counting not having to pay interest or any value appreciation.
Is there anything I'm missing here?
Can you sell your home to an LLC you own to take advantage of the appreciation under primary residence tax rules then owner finance loan with LLC so your loan payment interest is still a deductable expense for the LLC?
Love reverse mortgages, but May not be viable if owner is going to be out of home for 6 months or more. Reverse mortgages require borrower to live in home more than 6 months a year. Accordingly, the van life away from the home for more than 6 months a year could trigger a default on the loan. These reverse mortgage companies actually make visits to the property to check that borrower is actually living there. Be careful.
If you're not planning to return to the home, ask yourself, if I had $600,000, would I buy THIS house, in THIS neighborhood as a rental property? Often a house you want to live in isn't in a neighborhood that is a lucrative rental market. A lot of times we buy a house to live in we don't buy in areas that are attractive for renters. Maybe instead of one house in a bad rental market you'd prefer to have 5 rental houses in near a college campus, or a beach, or retirement area, or... Mortgaging 5 houses with 20% down will give you stability when one or two aren't under contract, you'll still have income from the other 3-4 while preparing the others for new tenants. Better use of Other People's Money (OTM)
You need a back up plan in case the Vanlife doesn’t work out
Depending on the location, RE carrying costs significantly eat at your gains.
You never really own RE, your rent from the local governing bodies.
Nope. I paid my house off when i was 39. Best decision i ever made. The stress of losing a job and not being able to afford your home is well worth it. Plus it allows you to ride out market downturns much easier knowing you won't have to sell stocks low if you get laid off. Reality is when the economy is bad YOU tend to get laid off and have your stocks go DOWN at the SAME TIME.
Another option is to cash out refinance your home and put renters in there. Living off that debt which is tax free of course
Hmmm.. Have to admit, I tend to think SCAM when the phrase reverse mortgage comes up...
A home is a liability that is "required waste" not an investment.
Quality of life can be screwed by having the wrong tenants. The right tenants is key but they are not guaranteed…
Renters can be insufferable 😮
If you rent your home, you aren't retired, you are employed as a landlord.
The sequence of return risk for the S&P would drastically lower the realized return compared to the more steady property return.
Don’t rent it out. Tenants are a nightmare.
Another thing to look at is your taxes on an investment property compared to your homestead property.