Big Mistakes Retirees Make with Real Estate

Posted by Tamara Berryman on Tuesday, November 25th, 2014 at 9:02am.

When it comes time retire, either in-part, for full time, it's wise to make decisions based on the future to make the most of the work you put into the past. Unfortunately, some new retirees make their decisions based almost exclusively on a financial basis and do not consider other factors.

For instance, retirement lifestyle in regard to location. A good example would be choosing an area that is chalk full of outdoor recreational opportunities, entertainment, culture, and more things to enjoy when there's time to enjoy more things. This is why Sarasota is such a great choice because there's plenty of choice and wonderful weather to enjoy recreation almost every day of the year.

Retirement is a marvelous opportunity but it can be a negative experience if the wrong choices are made with regard to real estate. Some missteps will only have a temporary impact while others can actually compromise your situation and cause it to become untenable from anywhere between a few to several years.

The Transition from Earning to Spending

In retirement, the average couple will spend more than they have earned and saved, which is why saving and investing many years prior is so important. That money will continue to earn while in investment accounts. Since your home is typically your largest asset, or one of the largest significant assets you have, it's imperative that you make good choices when choosing not only a location but the type of property you purchase.

"...many retirees are house-rich but cash poor, to the point where their house will be worth more than their retirement accounts. real estate [costs include] taxes, coinsurance, utilities, services, repairs and replacements, further reducing discretionary spending." --Forbes

As the nearby quote points out, some retirees homes are their largest asset, not only because of equity, but also location, size, and features. In these scenarios, it is at all uncommon for retirees to live in houses which substantially reduce their monthly discretionary spending. More often than not, this is due to making a decision based on an emotional one to stay in a large home with a lot of sentimental value rather than a long term financial calculation.

By the same token, keeping certain possessions will also present financial burdens which are elective, or, unnecessary. For instance, a self employed tradesman who is entering retirement and keeps a work vehicle. State fees and maintenance costs will be a reality for as long as that vehicle is owned.

The Biggest Mistakes Retirees Make with Real Estate

Selling and purchasing near or during retirement can be risky propositions, as timing is often a large factor, as are lifestyle choices. Here all are five mistake retirees most make with real estate:

  1. Not downsizing at the right time. Staying in the family home is very tempting, especially if you've made substantial improvements over the years to your property. However, those improvements were an investment and retirement is an ideal time to realize a return. As a result of not moving, an unnecessary burden is placed on saving and investment accounts in the form of higher property taxes, higher utility cost, and future repairs. It's best to downsize sooner rather than later.
  2. Not using home sale proceeds in the most advantageous way. A good percentage of retirees are able to realize a profit from the sale of their own home. It makes sense to use those proceeds to purchase a smaller property, however, smaller doesn't always mean less expensive. Speaking with a financial advisor can be time well spent to make a decision about what to do with the funds from a home sale.
  3. Not becoming familiar with a relocation area. It's one thing to research an area, even visit it a few times, but not being actually familiar with a location can be a big mistake. Get to really know a new area before you commit to a purchase.
  4. Not having comfortable financial means to maintain two homes. Some retirees prefer to maintain the snowbird lifestyle, opting to keep a home in one geographical location and purchasing another property in another type of climate. This is fine so long as it doesn't come with financial strain or emotional stress.
  5. Not getting away from borrowing. With interest rates being low, and property prices being reasonable and affordable, it's very tempting to take out another mortgage to purchase a primary retirement residence. Having a mortgage in retirement is based on your personal situation, so, consider all scenarios.

Another mistake some retirees make in regard to real estate is to purchase a rental income property that is not located in the area where they'll spend their retirement. While it's smart to maintain a positive and passive income stream, it's best that a rental property be near to check-on occasionally and, to ensure any repairs are done properly.

Tamara Berryman
Google

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