How Home Buying Fits Into My Retirement Plans Comments38 Comments

As I get closer to closer to buying my first home, I’m getting pretty excited. It’s not just the extra freedom and satisfaction that I’m excited about though. I’m also excited about how this plays into eventual retirement plans.

Many people just think of stocks, bonds and mutual fund investments when saving for retirement is mentioned. Really there is so much more than just market related investments. Physical assets such as your home should definitely be considered.

For people like me who live in an expensive city this is especially true. The home we are buying now will go a long way to fulfilling our retirement savings needs. Eventually we can sell off this condo, downgrade to something cheaper and use the cash for day to day needs. With any luck, the housing market keeps growing here and we even net a nice profit from that sale.

There is the possibility that the housing market collapses in the meantime though. So we cannot count on definitely getting the full amount back down the road. With that in mind we’ll still need to save as much money as possible on top of the value of our home. Most likely the condo will keep its value, but it’s best to play it safe.

The route we will likely take is to one day upgrade to a bigger home. At that time we can sell our current condo and have a major chunk of the next home paid off. Either way we’d be building up equity that can later be liquidated.

Some of you are probably wondering why we don’t just plan to rent the condo out. Unfortunately this condo does have rental restrictions which drastically limits how many units in the building can be rentals. So that’s not really something we can rely upon. If not it would be great to be able to rent out our home to add some nearly passive income.

Part of our plan is to gradually do some renovations to our condo. Not only will this make it a nicer place to live, but it will raise the value of our home and make it easier to sell when the time is right. Who wouldn’t want to make an investment that will also make you more proud of your home and ultimately happier? And yes I know that some renovations don’t add a comparative value back to the home. We’ll just have to keep that in mind when deciding on renovations to tackle.

The great part of including your home value in your retirement planning is that it can lead to extra motivation to put aside more money. While putting money into stocks and other investments, it can be tough to be satisfied with progress towards a large end goal. As a result you might not save as much money. When paying off a mortgage, reducing that total is a much more attainable goal that can be achieved a lot quicker than your final retirement goal. For psychological reasons it is just easier to get motivated to pay off debt than it is to save for a long term goal.

What about you? Is your home a major part of your retirement plan? Or do some of you choose to exclude it as somewhere that you will still live when you are older?

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By : Jeremy Biberdorf | 25 Apr 2013
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38 thoughts on “How Home Buying Fits Into My Retirement Plans

  1. jp

    the nice thing about real estate in your retirement is that even IF housing prices drop, they have a built-in back up – you can rent it out and still have an income. people are always going to need a place to live.

    Reply
    1. Jeremy

      That is very true. When housing prices drop you don’t see the same kind of drastic drop in rental prices. Some people go the route of attaining multiple rental properties so that they have a steady stream of passive income.

      Reply
  2. John S @ Frugal Rules

    I think we’re viewing that way, to a certain extent. We don’t plan on living in our current place until retirement, so there is value in using the potential sale to apply a big chunk to our new home. That way we should be able to go into retirement mortgage free.

    Reply
  3. Grayson @ Debt RoundUp

    I don’t currently use my home in my retirement plans, but I am hoping to use the next one. If we are in the home for a long time, then we can build some serious equity. I would rather reach retirement without using it.

    Reply
    1. Jeremy

      I figure we might be in this home for quite a while. So we’ll probably build up some good equity too. As much as we’d like to just stay there 5-10 years, with housing prices we have to consider the possibility of it being more long term than that. Using that equity before retirement might not be such a bad thing though. Put into a solid investment while the housing prices are doing well might be a smart move.

      Reply
  4. Mrs. Pop @ Planting Our Pennies

    It’s great that you’re well aware of the rental restrictions on your condo building. How did those play a role in your decision to buy? For me, I’d look at it as a big drawback since it ties me to a specific location with less of an ability to get up and head where opportunity takes us.

    Reply
    1. Jeremy

      Well originally in your search we were avoiding any condos with rental restrictions but this one just had too many other benefits going for it. With the rental restrictions at least we should have more respectful neighbors since we have to put up with each other long term. One of the condos we looked at without rental restrictions just seemed a lot less friendly with a lot of people only staying there a year or so. We do have the option of later buying a rental property while we’re still paying off this condo.

      Reply
  5. Nick @ ayoungpro.com

    Real estate is definitely a huge part of my retirement plan. We recently moved out of our condo and are renting it out. We plan on doing renovations throughout the year (my brother-in-law is renting it from us so it is easy to do renovations). We are also building a new home as well. The really nice part for us is that the PMI on our FHA loan will come off in 5 years and at that point we will be able to rent the condo out for $1,000 – $1,1000 a month and our payment will only be $540 a month.

    Reply
    1. Jeremy

      That sounds like a pretty sweet situation where you can still do renovations with the tenant there. Normally you’d be stuck doing that while living there yourself or while it sits empty. I am jealous about the kind of profit that you’ll be making off that rental down the road. With that kind of price difference I’m sure you’d be thinking about getting a second rental property some day.

      Reply
  6. Liquid

    A home is one of the best investments one can make :D It was documented in that book Millionaire Next Door that 97% of millionaires in the US are home owners. Coincident? ;) I consider my apartment a part of my broader retirement plan. I like how it forces me to save by adding to my equity every month as I pay down the principle.

    Some folks like to pay down their mortgage as quickly as possible. But I like to take a more balanced approach. I tend to stretch out the amortization for as long as I can and pay the smallest monthly mortgage possible. This would give me more free cash flow to invest in other things like another property or stocks. Many years from now real estate value will probably be higher than today. But it’s not like the appreciation of my home in the future is somehow affected by how long it takes me to pay off my mortgage. Future home buyers wont to pay more for a condo just because the seller is debt free. But the value of my stock portfolio in the future IS affected by how early, and how much I invest in stocks, commodities, and other investments today because like real estate, other asset classes will most likely also appreciate over time. So once a seed of investment has been planted it’s time to go plant other seeds :) In the end it’s those who planted the most seeds and are exposed to the most potential future profits who will benefit from the most combined growth, not those who spend their entire time focusing on just one investment. If rates were higher today I would consider otherwise, like aggressively paying down the mortgage, but with 5 year mortgages at 2.7%, even the dividends alone from a well balanced stock portfolio is more than enough to cover that interest expense :) Just my thoughts, but I know not everyone agrees.

    Reply
    1. Jeremy

      Very good points. I think once I get more comfortable with investing I’ll definitely try that strategy. If I can get some decent returns, I sure won’t be rushing to pay off my mortgage instead. Your analogy about planting seeds is pretty solid. I gotta get planting some more seeds asap. I know people tell me about how good it is to pay off a mortgage asap, but I’ve never fully bought into that. Unless mortgage rates rise to the levels that stock investments return, it just doesn’t make a whole lot of sense. Thanks for the reminder.

      Reply
  7. writing2reality

    Because my primary focus in on generating passive income through a variety of sources, including rental real estate, I’m not as worried about the value of any personal residence as it relates to my retirement. Instead I look at things from a income/expense cash flow perspective.

    As you mentioned above, paying off your mortgage is a very much a psychological motivator. There is a finite finish line. You know at X dollars per month, it will take you Y months. In this case, your benefit isn’t from increased income, such as investing in stocks, but from reduced cash flow needs as you no longer have a monthly mortgage to pay for upon completion.

    Whatever it takes to motivate someone to save/invest is the best decision.

    Reply
    1. Jeremy

      Reduced cash flow needs are nice, but as Liquid mentioned above, I’ll need to take into consideration what other investments can return. I mentioned paying off a mortgage quicker as a motivating factor, but I don’t see that being the case for me. I know there’s the whole psychological benefits of getting out of debt, but the logical side of my brain tells me to go for the best overall profit with my money.

      Reply
      1. writing2reality

        Same boat here Jeremy. I fully intend on taking advantage of the leverage afforded to me with a mortgage. I am confident my investments/inflation will far outstrip the interest rate on any real estate debt over the long haul.

        Plant those seeds, and plant them now!

        Reply
        1. Jeremy

          I do regret not planting more seeds earlier. The people who get started on that kind of stuff early on will be really well off later in life. I hate to think where I’d be if I hadn’t wasted so much money on my car. I guess I shouldn’t live with regrest though and should instead focus on doing what I can now to catch up.

          Reply
  8. Edward Antrobus

    While I wouldn’t consider a primary residence as part of a retirement portfolio, it is an integral part of my retirement plan. Currently, our rent takes up roughly 50% of our monthly expenditures. Having a paid-for home at retirement would therefore reduce our savings needs by half. If a 200k purchase now saves us from having to save an additional million dollars, that seems like a pretty good ROI to me.

    Reply
    1. Jeremy

      Interesting take on this. Planning to stay in the same home during retirement does really reduce expenses. I don’t see us staying in the condo we’re buying for that long though. Time will tell though. We might end up staying there much longer than planned.

      Reply
  9. Shannon @ The Heavy PUrse

    A few years ago we contemplated moving and even put our house on the market. Ultimately we decided to stay. I can’t say this is our forever home, although we will most likely be here at least another 10 years because we don’t want to move until the girls finish school. I am not considering it as part of our retirement plan, but it is/will be a great additional asset to have.

    Reply
    1. Jeremy

      Staying at the same home while raising kids is something to consider. Moving around isn’t much fun for them as they’d have to keep adapting to new schools and make new friends. Leaving behind old friends is tough too. Once we have kids that will need to be something to figure out at least before our kids starting going to school.

      Reply
  10. Jai Catalano

    My wife and I owe 2 places and both of them make us money but the mortgage isn’t paid off. As long as it’s not a liability we hope to keep it as part of our portfolio.

    Reply
    1. Jeremy

      That’s cool that you’re making money from both of those properties despite still paying off the mortgages. Here in Vancouver you’re lucky to break even in that situation. Also cool that you have a new blog dedicated to finance. Best of luck with that.

      Reply
  11. Chris @ Stumble Forward

    We defiantly plan to stay in our home for as long as we can, especially since we just got done building a new house. However the great thing about our house is that the cost is around half of what someone in a larger city would pay. On top of that the taxes are far less so building was defiantly an option for us.

    Reply
    1. Jeremy

      Yes if you’re going to build a home you might as well plan to stay there for a long time. I bet your costs were much less than half the price of a house in Vancouver.

      Reply
  12. Kim@Eyesonthedollar

    I don’t really look at our current home as a retirement plan really. We do hope to pay it off and live her for quite a while. Someday, when we do sell, hopefully we can buy a smaller place outright and pocket some of the profit.

    Reply
    1. Jeremy

      It would be nice to buy a home outright and still profit on top of that. For some people it probably doesn’t make sense to consider that potential profit into your retirement planning. It is a little too much of an unknown. Instead you can use that money to live a better lifestyle.

      Reply
  13. Rich Uncle EL

    I feel the same way about a house helping my family in retirement, but I am thinking of it in a different light. What I mean by this is that I eventually want to find a forever home that I can live forever. I want to pay it off in 15-20 years and then reduce expenses by not having a mortgage, this will allow me extra funds to use in retirement for leisure.

    Reply
    1. Jeremy

      I can’t say I’m quite at the point of thinking of where I’ll live during retirement. Not having the expense of a mortgage during retirement is pretty crucial. So maybe at my age I should start thinking about that more.

      Reply
  14. Darnell Jackson

    Good topic Jeremy,

    I would caution people to consider their home EQUITY more than their house when considering retirement.

    Just think most people I know who bought a home in 2005 have lost 50% or more of their house’s value. This makes them MORE broke than they were when they started.

    The good news is there is a better way.

    It’s called the auction.

    Reply
    1. Jeremy

      Of course those people had no idea that they could lose so much value in their homes. Auctions might be a good option to get a home for cheap. My realtor told me some horror stories about going that route though. I don’t know how it works in the US, but here there is often someone still living in the home after it gets foreclosed. They often go out of their way to make it difficult to show the place so that they can stay there longer. So the place is usually a mess and not very well maintained. I heard about one even taking the furnace with him when he left.

      Reply
  15. Kevin@OutOfYourRut

    Hi Jeremy–I think the rental restriction is bigger than you believe. Scenario: You’re offered a job in another city – one that’s too good to pass up. Since the rental option is out of the question, you have two options: carry the property at a loss or sell it.

    If you have built up some equity in the house and the market is healthy, you can sell at a profit. But if the market is flat or declining you will be forced to sell at a loss. I wouldn’t be willing to give up the rental option, especially with a condo. They’re usually easier to rent out than to sell.

    Another consideration…condos aren’t always easy to sell. When housing softens in general, the condo market collapses completely. In that kind of market, the rental option will become huge.

    And yet another issue – if there is no option to rent out in the project, isn’t that setting up a foreclosure bloodbath when the market tanks? It seems like a recipe for strategic default! Also, no rental option means no investors will be able to buy in, and that shuts out a big chunk of potential buyers.

    In the opening paragraph you mentioned “freedom” as a motivation to buy – but it seems you’re already giving a lot of that up with the rental restriction.

    I don’t mean to be a downer, but I was in the mortgage business for a lot of years and saw these scenarios play out in the real world. Please reconsider buying a condo with a rental restriction – you’re financial dream house may turn into a nightmare.

    Reply
    1. Jeremy

      Thanks for your valid concerns Kevin. It is something we thought about a lot. Vancouver is a different kind of market though. A lot of the investors don’t actually rent out their condos but instead leave them sitting empty. It doesn’t sound like much of an investment strategies but these are primarily overseas investors who are just looking to protect their money by investing it outside of their country. Maybe they can’t be bothered to manage rentals either. Housing prices here have seen a steady increase over the years too.

      We did make a point of buying a place that would give us the flexibility to stay there long term if necessary. So we do have a backup option if the market is weak when we get to the point where upgrading might be tempting.

      In most markets it definitely would be a good decision to specifically go for buildings without rental restrictions for the reasons you mentioned. We decided that we are willing to give up that extra freedom to get a place that we really like.

      Reply
  16. Brian

    Real estate is well documented add part of our retirement plans, it seems to be a common theme in this city. Too bad about the rental restrictions, that was something that we avoided when looking for a place because we knew we wanted to rent it out. As long add You know your plan going in though, it shouldn’t be a detriment.

    Reply
    1. Jeremy

      Yeah I know it isn’t the ideal situation, but for the price we were getting made it too tempting. If we insisted on no rental restrictions we’d probably have to go out to Surrey to get similar value. If our finances go well we can later try to flip this condo and upgrade or buy a second property just as a rental.

      Reply
  17. Carolina Rollins

    Personal finance expert Carmen Wong Ulrich says for some first-time home buyers, interest rates are lower right now. If you need to take money out of a Roth IRA for the purchase, she advises you replenish it so you’re continuing to build your retirement savings.

    Reply
    1. Jeremy

      Here in Canada they have a setup that has that very thing in mind. When you take up to $25k out of your retirement account for a first home you don’t have to pay taxes on that withdrawal provided you refill that amount within 15 years.

      Reply
  18. Jenna from Wolf Construction

    I get to think about retirement this early upon reading this article. I’m not an American and I think I live simply. It is common in our country to retire in our home place where we usually have our homes built.

    Reply
    1. Simon

      Well, glad the article spurred retirement thoughts in you :) I guess our cultures are diffrent in terms of where we retire and what awaits us in our retirement!

      Reply

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