Advertiser Disclosure

advertising disclaimer
Skip to main content
ask millionacres

Ask Millionacres: Should I Buy My Future Retirement Home Now?


[Updated: Dec 21, 2020] Jan 30, 2020 by Matt Frankel, CFP
Get our 43-Page Guide to Real Estate Investing Today!

Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide.

*By submitting your email you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.

Below is the first question in our Ask Millionaces series. You can always email newsletters@millionacres.com to ask a question and have it answered by one of our experts.

Q: I have a question that I've been searching for my own personal future. I'm about 20 years to retirement and plan to move to a different state when I retire or at least become a snowbird when it happens. My hope was to possibly buy a home in the South in the next five years. Maybe fix it up to make it worthy, but also rent it out until I want to use it in 15 years. Obviously, by renting it out I could potentially pay it off before I truly want to use it during retirement. Do you have any insight into being successful with this scenario? -- Ben R.

A: Ben, my wife and I are planning to do essentially the same thing, so I jumped at the chance to respond to your question! We plan to buy a vacation/rental home in the Florida Keys within the next year or two, rent it out when we aren't using it, and eventually become snowbirds when it's time to retire. And since I'm 38, I have a similar retirement timeframe to you.

There are some advantages to doing this. Aside from locking in your future retirement home at today's prices, you can get some tax advantages that are typically unavailable to investment property owners. For example, by eventually making the home your full-time residence, you might be able to exempt some of your capital gains from taxation if you eventually sell the property.

Before you set this plan in motion, however, there are a few things to consider. First is financing. Do you plan to finance the property as a second home or an investment property? Both have their pros and cons. Second home interest rates are comparable to primary residence mortgages and have generally lower down payment requirements. However, there are often rental restrictions, and you can't use any of your expected rental income to help you qualify for the loan, so you'll have to be able to justify your new mortgage payment and your existing mortgage payment, if you have one, with your income.

On the other hand, an investment property mortgage typically has a higher interest rate and may require you to put more money down, but you'll have the freedom to rent the home as you see fit. You can potentially use some of the property's expected rent to help you qualify for the loan, but to the downside, you might not be allowed to personally use the home at all for a certain length of time.

The other big consideration is your plan for renting it out. Would you rent to long-term tenants, or would you rent to vacationers on a short-term basis? You can generally get more money out of a property by using it as a vacation rental (provided it's in a place people want to vacation). However, it can be extremely challenging to manage a vacation rental from a long distance, and property management can be expensive -- think 25% to 50% of collected rent for a vacation rental, as opposed to just 8% to 10% for a long-term rental.

Finally, if you are counting on the rental income to cover your ownership expenses (mortgage, taxes, insurance, etc.) entirely, it's important to do a thorough and realistic cash flow analysis on any property you're considering and move on in your search until you find a property where the numbers work. This shouldn't be too much of a problem since you have a five-year time frame until you're ready to buy, but keep this in mind -- you make your money on an investment property when you buy, not when you sell. Shop accordingly.

11% of the mega-wealthy swear by this investment…

The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.

If you, too, want to invest like the wealthiest in the world, we have a complete guide on what you need to take your first steps. Take the first step toward building real wealth by getting your free copy today. Simply click here to receive your free guide.

The Motley Fool has a disclosure policy.