No one decides to retire at the drop of my hat. That is, no one apart from my dad.
One day, my dad was told that his company was being acquired and his job would be eliminated. So, he shook the owner’s hand and retired. Like most folks in their 60s, he’d been planning for retirement for a long time.
For most retirees, their golden years mark a financial shift in life. They go from building and saving wealth to living off what they’ve amassed and social security. Since many retirees’ largest investment is their home, it’s only logical that figuring out their retirement living situation, and how it fits into their investment strategy, is their top priority.
If downsizing is part of your 2021 retirement plan, the planning process should start now. This is particularly important during the Covid-19 era, when the logistics of downsizing might take a little more time than they normally would. As you begin this process, below are some tips to consider to ensure you’re maximizing the financial benefits of downsizing.
1. Decide whether you’d like to sell or rent your home.
Some retirees like the idea of receiving a lump sum of cash when they sell the home they’ve lived in. However, it’s important to realize that selling can have large costs associated with it, such as capital gains taxes, real estate commissions and legal fees. At the end of the day, you might be giving up 20%-25% of your biggest asset when you sell your home, assuming you pay a real estate agent about a 5% fee and incur capital gains taxes of around 15% associated with the sale.
When you sell, you also lose out on the wealth-building and passive income opportunities of turning the home into an investment property. Holding on to your home as an investment property allows you to generate retirement funds and leave your family a valuable nest egg.
It’s common for retirement and estate planning to go hand in hand. Many folks don’t know that when real estate is inherited, the taxable gains are erased upon inheritance. So, keeping your home is a fantastic way to preserve wealth for future generations.
If you need to turn some of the equity in your home into cash, consider refinancing or taking on a second mortgage and then renting out the property. The rental income could cover the costs of holding onto the home and, depending on the amount you mortgage, likely provide substantial net income as well.
2. Line up the best professional partners for downsizing.
Once you decide on whether you want to sell your home or hold on to it as an investment property, the next step is lining up professionals to help you achieve your intended goal.
If you’re choosing to sell a home, take the time to find a great real estate agent. There is no silver bullet for choosing someone; I’d suggest going by a combination of personal recommendations and Zillow-certified reviews. Don’t just pick the first agent advertised in AARP.
If you decide to convert your home into an investment property, you can search for companies that offer an all-in-one solution to turning the home into the property and overseeing it. (Full disclosure: Mine is one such company.) Or, you can go the a la carte route of lining up a combination of real estate agents, financial advisors, insurance broker, tax assistants, property maintenance managers, etc. The path you choose to go largely depends on whether you want a truly passive investment or an investment that’s more of a part-time job.
3. Pay for an inspection sooner rather than later.
For a few hundred dollars, you can hire someone who will tell you all of the potential issues with your house that could arise when you eventually do sell it or rent it out. These inspections can also be helpful as you decide whether you want to pursue minor renovations that can increase the value of your property.
I’d get this inspection done six months before you’re planning to move so you have the appropriate time to fix what you’d like to fix.
4. Choose the best time of year for the sale or rental conversion.
One of the easiest ways to maximize the value you get from your home rental or sale is to decide on the right time of year to list your property.
For example, here in Boston, spring is typically the best time of year to sell, and September is typically the best time of year to find a tenant for a rental. The selling and rental seasons in every city are slightly different, so do your research and plan your move accordingly.
5. Be cautious of iBuyers.
IBuyers are organizations that buy your home in an all-cash, upfront offer. The process is often quick and hassle-free, but you may pay dearly for the convenience. According to Collateral Analytics, iBuyers can cost home sellers 13% to 15% of a home’s sale price. If you’re selling your home for $500,000, this means you very well could pay a iBuyer upwards of $75,000 for their services.
6. Don’t settle for a low home sale price.
If you decide to put your home on the market and it’s not generating the value that you’re expecting, don’t automatically agree to a real estate agent’s advice on markdowns. Consider first changing agents or exploring whether you might see a better financial outcome if you turn your home into an investment property.