Part Three in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.
NOTE: – Double and triple check your scenarios with a financial planner whose fiduciary duty is to you!
Option One – Downsize and Buy.
Couples sell their home and purchase a less expensive house.
For both couples, this option
Generates extra income for consumption, provides a legacy for their heirs and allows them to enjoy the comfort and autonomy of home ownership.
It also preserves the option to further tap home equity in the future through various types of loans which will be discussed later.
Don’t forget both couples have to
… maintain and cover the continuing expenses of a home.
They might also have difficulty finding a less expensive home in the same community — or timing that purchase with the sale of their original home.
Or, the stress of relocation.
Once they find their new home, they have to incur the emotional and monetary costs associated with moving.
Option Two – Sell and Rent a less expensive residence
Both couples escape the expense and responsibility of maintaining a home.
They might also have greater latitude to move to a different location immediately or as their circumstances change.
As renters, both couples lose control over their future housing costs.
They’ll face constraints when they want to personalize their home to suit their specific needs or tastes.
And maybe more significantly.
The Smiths, in their early 60s, could also face high cash outflows in rent for many years — longer than it takes to pay off a 30-year mortgage if they live until their mid-nineties.
Option Three – Become a landlord. And a renter.
A third option available to our couples would be to rent out their existing home and to rent a less expensive home.
If they convert their home to an investment property, this will introduce some changes to their financial situation.
The income they receive from renting out their home will be treated as taxable income.
They can now deduct certain home expenses such as insurance and maintenance and are able to take depreciation on the property.
Good news. The original home can be handed down to future generations —
… a potentially substantial benefit.
Cash flow concerns.
Unless the rental unit is significantly less expensive than the original home this choice will produce minimal additional cash flow.
At this stage in life do you really want a part-time job?
Plus deal with the emotional wrench of maintaining your home for someone else.
Also, remember the following points for the renting out existing home scenario:
Home is depreciated on the 27.5 year straight-line method as required under current tax law. See IRS Publication 257 — Residential Rental Property.
Home maintenance and insurance are deductible as rental expenses.
An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.