by Broderick Perkins
If you buy a second home now for retirement later, you could give yourself a hedge against home price hikes as well as a relatively low-cost retirement shelter with an equity cushion.
That assumes during ownership you can find tenants who'll pay enough rent to cover your investment costs. You'll also have to be able to actually use the property when you retire.
"Buying a retirement home while you're still employed is a wise investment, if you can keep it rented until you're ready to move in," says Valerie Patterson, senior producer of RealEstateJournal.com.
That means you'll have to find a property you can rent for an amount that will cover not only the principle and interest but also the bulk of property taxes, insurance, property management and maintenance costs, home owner association dues and any other costs, actual and estimated, associated with property ownership.
Patterson says if you can't secure a tenant, or if the rent you collect doesn't cover your monthly payments, even locking in a low interest rate now may not be wise unless you've got the extra income to cover the difference.
Don't forget to consider tax benefits that can help offset costs.
In addition to mortgage interest deductions on owned home values up to $1 million, tax deductible passive losses on rental properties are as much as $25,000. The passive loss amount does begin to phase out once your modified adjusted gross income reaches $100,000 and is completetly phased out once your income reaches $150,000 says Marie Sternberger, an enrolled agent from Sunnyvale, CA.
Sternberger says don't overlook non-financial considerations related to buying a retirement home now to live in later. Your heath, the climate, some unforeseen event or change could prevent you from moving into your second home at retirement time.
"You would have to sell and pay taxes on the gain, but you could take any passive losses you had not been able to take advantage of. You could do a tax-free exchange of like property somewhere else. You would have some options, but I would be leery of buying a retirement home way in advance of retiring. That's just my opinion," Sternberger said.
Patterson said the upside to buying your retirement home now is that you can count on having someone else paying your mortgage for as long as you rent it. You'll inherit a home with at least a part of the mortgage already paid and a relatively low interest rate locked in.
"It's a good idea to get a head start on retirement living. Your favorite location might be a lot more expensive in 10 to 15 years when 73 million baby boomers begin retiring," said EscapeHomes' CEO David Hehman.
Appreciation may also help offset some of your costs, but to maximize your investment as a retirement nest egg, you probably don't want to tap your home's equity unless it absolutely necessary for some dire financial need.
"However, if home prices fall, you might wind up paying more for your house than you needed to," Patterson cautions. "But it's far from certain that prices will fall, and even if they do, they could easily run up again in the future," she said.
In any event, buying a retirement home now to live in later begins with even more considerations.
Investors should shop for a second home much in the same way they shopped for their first home. Buy the cheapest home in the best block or buy into the cheapest neighborhood in the best community, both to give the home's value room to grow. However, if such a home doesn't garner rent sufficient to cover the cost of ownership, look in areas where rents have been established.
Look for appreciation potential, typically found in areas where demand eventually will exceed supply. Avoid heavily marketed, but unproven areas. Property with future marketability for you should you need to sell or your heirs also should be considered.
Find a home in close proximity to as many preferred activities, attractions and events as possible. The more of these area features the better the potential for renting the property at a decent rate and selling at a high price later.
"We recommend that prospective buyers identify a gated, master-planned community -- for security and peace of mind -- with the amenities, such as golf, tennis, fitness, clubhouse, etc. that they would enjoy years from now," said Elisabeth Miller-Fox, president of PrivateCommunities.com.
Consider "try-before-you-buy" mini-vacation getaways offered by timeshare developments in potential investment home purchase areas. For no more than a nominal fee, if any, the trips come with an obligation to tour the development, but the rest of the two-to-three day jaunt provides plenty of time to check out the community and potential investment homes -- at the developer's expense.
"We urge prospective buyers to go through the rental process themselves before taking the step of second-home ownership," said Miller-Fox.
Get professional representation for the search, mortgage and property management.
"An equally important factor for this type of purchase is the existence of a rental department that is associated with that community's sales department since people who have rented in a community are often the best source of new sales for the community," said Miller-Fox.
"The rental department is a strong marketing tool for the developer and they typically do a good job of keeping the property rented at the highest market rates," she added.