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Rent Your Way to Retirement

5 Posts tagged with the vacation_home_retirement tag

How does buying a second home compare to investing in common stocks?


Conventional wisdom still holds that, over time, common stocks offer the best returns. This may be true if measuring cash-on-cash return, but when looking at total return, the picture changes.


The ownership of real estate offers four distinct advantages over stocks, according to John Tuccillo, former chief economist for the National Association of Realtors.


* Real estate prices are less volatile in most areas. Stocks can move a great deal in both directions. This can make ownership of stock a high-risk proposition, with profit often dependent on timing.

Stocks can bounce up and down. Someone who cashed out one year might have seen a huge return; someone else who waited another year could lose a great deal. House prices fluctuate as well, but to a lesser range. If real estate prices don’t shoot up the way stock prices do in a bull market, real estate markets don’t crash the way stocks do when the bull runs out of steam. In short, it’s a less risky investment most of the time.


* Real estate is a leveraged investment. One can own a home with a down payment of 20 percent. Most investors can’t do this with stock. They need to pay the entire price of the stock. Because of this difference, when the price of a stock rises 5 percent, the investor makes 5 percent on his or her money. If real estate purchased with a 20 percent down payment rises by 5 percent in value, the return is upward of 25 percent.


* Real estate is tax-advantaged. Any interest incurred for the financing of a second home is deductible from ordinary income for tax purposes. If a second home becomes an investment property, tax can be deferred and sometimes eliminated. The stock investor, on the other hand, pays capital gains tax and can’t deduct the interest on any debt incurred for the purchase of financial assets.


* An investor can live in real estate. The investor can’t go to sleep in a stock certificate, or use it to fish with their children. Investors can only look at certificates and hope they make money. Real estate provides many kinds of satisfaction that money can’t provide.


A second home has long-term wealth-building powers. In a nutshell, if the owner thinks a house is good enough to live in and enjoy, someone else will too, and they’ll pay for the privilege to rent it.


The ownership of an investment home, particularly a property the homeowner can personally enjoy, pays dividends on a variety of levels and can be a very profitable road.


“I know the real way to retire in Mexico,” said Jeffrey Hill, a part-time Fort Lauderdale resident who uses to promote his rentals. “Start before you are ready.”


Hill, a former Seattle resident, has four vacation rental homes in Puerto Vallarta and one in Florida. (“Does that tell you which is more profitable?”) He spends most of his time south of the border and part of his year in Fort Lauderdale. 


“Take your investment money and buy a second home today where you want to retire or think you want to retire. Create a good rental property, and rent it for the next five, 10 or 15 years. The sooner you start, the better. I would not be where I am today had I not bought my first home in Mexico 11 years ago. In fact, I wish I had bought 30 years ago.”


Hill and others bristle at the thought of Mexico being stigmatized by media coverage of violence.


“There have been no incidences of drug violence in our little beach community of 15,000,” said Glen Triplett of his 5,000-square foot villa at Rincon de Guayabitos, 45 miles north of Puerto Vallarta. “The local people are very friendly and it is a great place to live.”


In reality, most of Mexico is unchanged and laid-back, warm and welcoming to foreigners. Owners like Hill say the country has received a bum rap, as reporters have raced to make the world believe that the entire country is dangerous. Many of the areas continue to appreciate, unlike most of the markets in the U.S.


Hill has been going to Puerto Vallarta for more than 30 years and has owned property there for more than 11. He estimates 10 percent of his rental clients ask about the drug violence. A far greater percentage asked him how to get started with a retirement home in Mexico.


“Buy now,” Hill said. “So many people leave their money sitting in some investment until the day they finally make the move to retire. They sell their home when they finally retire and start looking for their new place to go. Well, it's very possible that as the years go by, the prices will continue to go up.”


An Individual Retirement Account (IRA) can help you achieve your goal of a second home that you hold for investment. Self-directed real estate IRAs are not only relatively easy by they are also not subject to some of the guidelines that apply to employee-sponsored qualified plans, like a 401K enforced by the Department of Labor.


To prepare for your real estate IRA, designate how much of your retirement funds you wish to use in the property deal and open a new IRA account with an independent administrator.


The guidelines covering real estate IRAs are stringent. If you break one of the following rules, you could jeopardize your tax-free status on your account.


  • The land or house must be treated like any other investment.
  • All rental profits must be returned to the trustee.
  • You cannot manage the property. But your trustee can hire a third party – a real estate broker, or local property manager – to collect rent payments and maintain or improve the property.
  • The house or property (or proceeds from its sale) must remain in the trust until distribution at retirement. If the trustee is instructed to sell the property, funds can be transferred to another account for reinvestment.


You cannot use IRA funds to buy your own residence or any other property in which you live. It must be investment property. But when you retire, you can direct your IRA to turn it over to you as a distribution at the current market value.


If you purchase the property with Roth IRA funds or convert your conventional IRAs to Roth IRAs for the purchase, the property appreciation would be tax-free.


Take the time to consider a second-home IRA – especially if you know the property will appreciate in value.

Here are three national firms handling real estate IRAs: Entrust Administration; Guidant Financial; Pensco Trust.


Auditioning for Retirement  

Posted by tkelly Nov 24, 2010

If you want to change your lifestyle when you retire, it’s time to start the audition.


Now is a terrific time to research and purchase a second home that you can use now for family vacations, while testing it out for retirement down the road.


According to the most recent study by the National Association of Realtors, consumers are making “a lifestyle choice” and turning to second homes sooner in their lives. That finding affirms what we know about Baby Boomers – the prime candidates for second-home purchases – who define themselves by personal experiences and adventure. Interestingly, they are now joined by their children – the proud members of the Gen-X and Gen-Y generations – who view practical experiences as paramount in their lives. 


There are two key aspects to a second home – the financial and the emotional.


Simply put, now is the time to buy a vacation home. Prices are down in just about every location, and mortgage interest rates are hovering at some of their lowest levels in history. Money can go 35 percent further now than a few short years ago.  More importantly, the economic downturn has begun to brighten.  Families are feeling they can afford to go on vacation again – providing you with solid backup if you need to rent out your eventual retirement home to make ends meet.


Second homes also can be filled with memorable experiences, and will mostly likely net you more than a few dollars down the road. They are flexible and interchangeable in their functions: recreation, investment and retirement. They can provide the moment of a lifetime, be paid for by other people and, when properly positioned, be traded tax-free.


If you have made up your mind to spend more quality time with your family, add to your investment portfolio or do a better job of planning for retirement, you accomplish all three by making a down payment on a second home. There’s never been a better time in the past seven years to “buy low” with the prospect of eventually “selling high."


Attempting to predict the bottom of a targeted housing market is like trying to pick the absolute low point of a stock or bond - you won't know until it begins to rise. Think of the memories you'll lose in the interim.



For those cash-strapped second home buyers who do not want to be forced into a tight time frame, renting or leasing with an option to buy can bridge the gap to purchase. If you really want the place, give it a shot. You’ll never know if you don’t ask.


Sometimes, a rental or leased home can turn into the permanent home for the renters, which is why a lease with option to buy is sometimes preferable. And, a lease option can buy time to research the area while getting a portion of the monthly rent credited toward the down payment.


Many owners make a commitment to purchase another house before selling their old one. If the first house does not sell, they are faced with making payments on both houses. To avoid this debt load, the owner agrees to lease out the first house for 12 or 18 months.


The lease agreement includes an option allowing the tenant to buy the property within the lease period. Here's how a typical lease-option works:


  • The owner and tenant agree on a purchase price.

  • The owner charges the tenant a nonrefundable fee for the option. 

  • The monthly rent is typically greater than market rates because no down payment has been made, but a portion of it applies toward the down payment.



Owners should read their mortgage agreements carefully before considering a lease-option. Some lenders may activate a due-on-sale clause if the borrower enters into a lease option with another party.


Lease-option forms are available at some stationery stores that carry professional forms. If you are concerned about the language of the agreement, consult an attorney or escrow officer.