I have been working with clients close to retirement to do this for about 2 years now. Depending on prices and interest rates, they don’t even have to rent out their house to wind up on the plus side. See the numbers below.
People who plan to buy a retirement home in the next 2-5 years, you should strongly consider buying now. They should not wait because interest rates and home prices will likely be higher. It may not seem like much, but small changes result in huge cost differences in the long run.
However, most people never think about buying their retirement home years in advance of their retirement. Buying now never crosses their mind. They simply plan to buy when they retire. It is really just human nature. Besides, it makes sense. Why would I buy now?
Consider buying a $200,000 home today with 20% down on a 30 year fixed loan at 4.0% compared to buying the same house in 2 years for $210,000 with the same loan at 5.5%. Not a big difference, right?
Only 5% more in price and a 1.5% higher rate make a HUGE difference. Compared to buying today:
Your payment is 25% higher ($763.86 – $953.89) with the higher rate and price in 2 years.
You will pay $17,656 more interest over ten years even though you waited 2 years to buy.
You will still owe $21,185 more on your home with the higher rate and price.
With these assumptions, they get the first two years in the house FREE! Buying now saves $38,841 which is far more than the cost of taxes and insurance for the first two years. Even if interest rates are only 0.5% higher, the differences can be huge to retirees since they keep the homes longer then most. Renting can make the house an investment until it becomes the retirement home.
What About Paying Cash?
There are two scenarios, paying cash now or paying cash when they sell their current home and retire.
For those who can pay cash now, their cash won’t earn money with rates this low and they can’t invest it in stocks if they need it to pay cash in a few years. Renting will often give them a better return on their investment than keeping their money in savings, money markets, or CDs.
For those who would pay cash later, renting allows them to cover the cost of the mortgage until they retire and sell their current home.
Not everyone can buy a house now, but the real surprise is when people won’t be able to qualify for a loan to buy the same house in a few years after they retire because their income is lower and lending is tighter.
- Buy now when prices are likely lower than in 2-5+ years.
- Buy now when interest rates are likely lower than in 2-5+ years.
- Avoid the problem of not being able to qualify for a loan with your retirement income.
- Management fees or time and effort to manage the unit yourself.
- Making the payment during any vacancy or monthly shortfall where rent does not cover the payment.
- What if you change your mind about where you want to live.
Be aware of local taxes on rental units. Many local governments in vacation areas passed or began enforcing renters/lodgers taxes on individuals renting out their homes and even searching VRBO.com and Craigslist to find people not paying the tax.
I also see the opposite where retirees buy their retirement home and rent out their prior residence instead of selling it as they wait for the market to recover. Many have a lot of equity in their home so the properties usually produce great cash flow. Many of these Accidental Landlords wind up deciding to keep their homes for the cash flow since savings rates are so low right now.