How to Use Your Home as an Investment When You Downsize
Guest Article by Jim Vogel
Downsizing your home in retirement has become a popular move for seniors. This trend isn’t surprising considering all the benefits - from a reduced burden of home maintenance to an increase in your financial freedom. You have great reasons for downsizing, and these reasons certainly play a role in where you end up moving. Before making this decision, though, don’t forget about the question of what to do with your current home. All the same reasons for downsizing impact this decision, too, especially when it comes to your financial future.
Can You Afford to Sell?
If your first thought is to sell your home when you downsize, you’ll need to explore all the financial implications. To start, can you sell your home for more than the cost of where you plan on moving? According to CNBC, many housing markets are so tight that it’s hard to find a less expensive home, even when you’re looking for fewer square feet. Be sure to research your local market and how the price of your home compares to what’s available to buy. If you plan on renting rather than buying another home, this may not be as much of a concern, but keep in mind that rent tends to go up over time.
Another thing to remember is that there are costs associated with selling your home. Besides the commission that goes to your real estate agent, you may also need to pay for repairs, upgrades, and staging to get your home ready to sell. Depending on how much work your home needs, combined with the potential sales price, selling could be a decision that has a major payout - or it could end up setting you back.
Can You Afford NOT to Sell?
As an alternative to selling, you could keep your home and rent it as an investment property. Of course, this only works out financially when there’s room in your budget to buy (or rent) a new home without selling the one you’re in. To help determine if this is doable, start by researching how much you can afford on a new home. This figure will depend in large part on your current income, any savings you can use as a down payment, and what your monthly expenses come to.
The last thing you want is to get in over your head by buying a home you can’t afford. This rule holds true regardless of age, but seniors who are living on a fixed income should be especially cautious about any investments. According to The Street, most retirees spend more on housing than any other category of expenses, including healthcare. The upside is that, while there’s little you can do to reduce other major expenses, you can make a housing choice that’s cost-conscious.
What Other Costs Should You Expect?
If you think your budget may allow for keeping your current home to use as a rental, there are a few other key factors you don’t want to overlook before making this big decision.
Costs of Homeownership
In addition to your mortgage, remember that there are other costs of homeownership that won’t go away if you decide not to sell. According to Acts Retirement-Life Communities, two issues that may influence your decision to sell are if you have high property taxes or if your maintenance costs are more than you can manage.
Costs of Being a Landlord
If you keep your home as a rental property, be sure to account for other costs of being a landlord. In addition to regular maintenance, there are costs to get the right insurance, incorporate your business if you choose to do so, and hire an attorney should you need to evict a tenant.
The ideal situation is to come up with a figure where your rental income is greater than your expenses. If you run the numbers and this is the case, and if you can afford to not sell, becoming a landlord may be a smart move. The decision ultimately comes down to what works in your favor financially and what feels like the right solution for you personally.
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