Over 55 and own a home? This is a MUST READ!
August 30, 2017 | Travis Franklin
Once we reach our 50’s our perspective begins to change, as do the things that are important to us. We have more knowledge, more perspective and more wisdom. Retirement is frequently at the front of our minds. What does retirement look like to you? What do you stay awake nights worrying about? In a perfect scenario, what do you want to do? Do you want to travel? Maybe open that boutique or small business you’ve always dreamed of? Seniors make great Realtors by the way! (we’re hiring!)
If you haven’t considered these questions, before continuing this article, I would sit down with your loved ones and make a list of what matters to you. Prioritize it and create a vision board. Is it palm trees, tropical music and long walks on the beach? Put it on your vision board. Is staying close to loved ones top priority or is it about finally getting the break you deserve and taking time to live large?
Wherever you may be at this moment in relation to your family or financial goals, knowing what your home is worth in relation to your portfolio and retirement goals is of vital importance once you reach your 50’s. I have coached, trained, mentored and advised a lot of people in my career, both clients, peers and fellow agents. One of my passions is helping people find the keys that unlock the door to understanding. Understanding why they do what they do and why they get the results they get – and of course how to do things differently and get different results. In a quote most widely attributed to Mark Twain he says, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” More often than not in coaching, we see this as the biggest hindrance to progress or change in a person. I hear so many people say “I’ll never retire”, and all that means is they don’t have the right information.
I am a real estate broker, which allows me to advise on real estate, real estate investments, and to prepare financial plans regarding my client’s real estate goals. At my firm, our intention is to help all our clients with their entire financial picture, so when it’s appropriate, we have strategic partnerships with financial advisers, trust attorneys, etc. to fill the professional gaps where our license leaves off. I am not a licensed securities financial adviser and I can’t advise about securities, insurance, stocks or bonds.
Sadly many people over 55 in America have no retirement savings, no pension and no real plan other than social security and/or working until they die. Does this mean they have no hope? No, and I’ll tell you why. Thankfully, most of them at least own a house. In Texas alone, there are 2.6 million homeowners over the age of 60. If we never make another investment in our life, paying off a house is the NUMBER 1 thing we can do to improve our retirement position. As a side note, though it may seem attractive at the time, if you keep refinancing every 4-5 years you will NEVER pay your house off.
Because I am allowed to give real estate investment advice, let me state the obvious. The planet is being populated by more and more people while the planet itself is not growing. Let us extrapolate that to indicate more and more people will be needing real estate while there will be less and less of it relatively. As further validation, let’s look back at the real estate market, price trend line from say 10,000 B.C to now, it’s a pretty solid “buy”.
What if you don’t have equity and still owe on your house? At this point, I advise you to devise a 5-10 year plan to involve: Look at refinancing to 10, 12 or 15 years if you just started a 30 year mortgage. Consider doing without luxuries, scrimping, saving, cutting costs, paying it bi-monthly, paying extra, driving an old car, or otherwise doing whatever it takes to pay it off. Never finance on a 30 year mortgage. The first 15 years are paying mostly interest and the bulk of the principal is paid off in years 20-30. Most people today live in a home for 5-7 years. How does that math look to you? If you use a 30 year mortgage and move every 5 years, you will be relying on the market to build equity through rising prices. Then you’re just trading equity for equity, what you owned became more valuable, but what you bought became more expensive. Now add in closing costs and there went your equity.
If you stay in a home 7 years on a 15 year mortgage at 3%, with a beginning balance of 200,000 you will have paid off nearly half the debt, owing just $116,664 at the end of 7 years. The same 200,000 mortgage, 7 years down the line will cost you a half percent more in interest, and will still have a principal balance of $164,771. That’s almost $50,000 difference in just 7 years. If we are average and buy 3 houses over our adult lives, and always use a 15 year mortgage, the point is we will build significantly more equity into our 50’s than those that move more often and use 30 year mortgages. In many cases, enough to retire. Let’s look at some numbers.
So how can I use that equity? There are two ways. First, you can live in the home, aging gracefully until the pilot tells you to prepare for your final descent. Once your health fades, you have to consider assisted living or moving in with family. Who wants to burden our family? We have an insurance expert who can quote reasonable rates on policies to cover you for that. Budget for it now, not later. Until that point, you can live off whatever retirement investments you put aside plus social security. If you didn’t put anything else aside, it’s going to probably mean a part time or even full time job. This is probably the most common scenario we see. Sadly, we see it end other ways not even this pretty.
Many people consider a reverse mortgage at some point as a supplement when their retirement income does not keep pace with cost of living. When I was in college at UT in Austin, earning my degrees in Finance and Real Estate, reverse mortgages were illegal in most states – including Texas. Like many other ethical barriers, this one fell at the expense of the weak, helpless, and destitute. It’s a legal way for predators to steal houses. Ok, that’s harsh. It’s a legal way for someone with no other alternatives to receive a monthly pittance in return for giving away their home. I’d most closely relate it to a golfer selling their soul to the devil for a box of golf balls and a green fee. Is there a time when it’s a good fit? No, sorry. If this is something you have considered, consult with me first and I’ll show you other, superior options. There is never a right time to do the wrong thing, nor a wrong time to do the right thing.
The second way is to maximize that equity with strategic planning, out of the box thinking and getting out of your comfort zone to stretch every penny as far as it will go.
Current IRS law states that you may exclude the gain on the sale of your primary residence if you lived in it for at least 2 of the last 5 years. This bit of tax code is provided from your local, friendly IRS website located at https://www.irs.gov/taxtopics/tc701.html
Qualifying for the Exclusion
In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You’re eligible for the Section 121 exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.
For a single person, you can shelter $250,000 of gain and for a married couple, it’s $500,000. Whoa! Hang on. Sell my house and not pay tax on the capital gain? Darn straight pilgrim. Then maybe there are more options than snoozing in the recliner until the last roll call. If I can keep that kind of cash, tax free, what can I do with it to maximize my standard of living and do the things I want to do?
Let’s say you bought your house 15-20 years ago, it’s worth $500k, and it’s either paid for or almost paid off. You could literally sell it, buy a nice house for half and use the rest of to buy two rent houses that pay a total $2500 a month in passive income. A paid off house and two rent houses is a nice addition to anyone’s retirement plan. The reason many folks don’t do this today is that smaller, newer, one story homes in a new subdivison are hard to find and they cost more than bigger, older homes. We can certainly achieve this goal however, if we’re willing to leave the market for another area with lower costs.
Are you willing to sacrifice some of your personal lifestyle to achieve your goals? If so, you can move to an older neighborhood that is in transition, fix a smaller one story home up exactly like you want it – and you can do that in our market for way less than $200,000 all in. If you owned a home that climbed in value to $500k, you would now have $300,000 tax free to invest, save or put to work in a business (like buying rent homes). You can also move out of the market completely and take advantage of other areas with low housing costs. Rural Tennessee has beautiful properties that are quite well priced along with a low cost of living, as do many other areas of the country. A condo in Florida may be exactly what you need and they can be had reasonably as well, even just blocks from the beach. When you have solid equity in your home, you can have these discussions!
What if you want to live in the Caribbean like I do? Let’s say you’re 62 years old and your $500,000 house is paid for. Are you willing to work, or do you have a passion you could turn into a part time job? Wedding planners, photographers, musicians, personal services, etc. are all booming industries in Island communities or vacation spots. In my experience, if you are sober and willing to work, you own your destiny in tourist towns. Could you earn $2000 a month part time working on an island doing something you enjoy? Yes. Absolutely. More? Absolutely, but that’s another coaching session! So let’s plan our stay. Rent at $2k a month for a villa with an ocean view, living expenses $3k a month. That’s $100 a day for food, internet, fuel, etc. Because that’s not all we want, let’s say we need another $5000 for income taxes, insurance and travel. For $10k a month you can live in an ocean view cottage, pursue a passion that pays you back and live a lifestyle you’ve dreamed of all your life. Yes. You. Can. But it’s outside the comfort of that recliner.
How do we get there? Passive income. Your $500,000 home can literally be sold and turned into 4-5 rent houses, generating $4000-6000 a month or more in gross income. After taxes, repairs and property management, figure 75% of that goes in your pocket. At 62, you can also take social security. The math suggests waiting until 66 is not advisable. If your annual benefit was as much as $50,000 it would take you 12 years to make up the money you waived between ages 62-64. n other words, you’d be 78 years old before you caught up. Most people will make about $2k a month. Between our rent houses and social security, we’re up to $6,000-7,000. If you and your spouse can earn $2,000-3,000 a month, you probably would not even have to touch savings or a 401k to live an absolute dream life. If you don’t have rent houses, let’s talk about it. Passive income is the path to retirement.
If the Caribbean isn’t your dream, the good news is the plan can be scaled to fit wherever you want to go and whatever you want to do. So first pay your house off or start paying it down. If the boom in the market gave you enough equity in the last few years and you think you’re close enough to start having these conversations, I offer private, one on one consultations. After we meet and discuss your goals, if needed we can co-consult with your financial planner or bring in one of our valued partners. We can look at options to structure your exit and provide clarity around every detail. At Franklin Brokerage, our specialty is providing the informational resources our over 55 community needs to have a higher standard of living and to maximize their equity.