5 Reasons a ‘Forever Home’ Mindset Could Be a Headache in Retirement
It’s not uncommon for young people to buy a property and declare it their ‘forever home.’ However, this idea might be easier said than done.
Your home should suit your lifestyle, and that will likely change throughout the years. Therefore, attempting to stay in the same place forever might not make sense.
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“Owning a primary residence can become a significant challenge in retirement, contrary to the picture that is often painted by real estate agents, mortgage brokers and title companies within the real estate industry,” said Lukasz Kukwa, a real estate advisor at eXp Realty in New Jersey. “These professionals may promote the idea that a primary residence is an excellent long-term investment but usually, it is self-serving advice that doesn’t take into account the pros and cons of each scenario.”
In reality, he said there is no such thing as a forever home, and a primary residence shouldn’t be considered a traditional investment.
“While homeownership can lead to potential appreciation and equity gains over time, it does not generate consistent returns like a true investment, such as dividends or interest,” he said. “When factoring in the costs of ownership — along with standard inflation — into the equation over time, home equity or profit are a pancake or at/closer to zero.”
Ultimately, he said your primary residence is a place for personal use, but not a source of income or profit. Here’s a look at five reasons having a forever home mindset could be a headache in retirement.
Market Fluctuations
“The real estate market is subject to fluctuations — just like any other market,” Kukwa said. “Economic conditions, interest rates and supply and demand all influence property values over time, which is not something we as homeowners or consumers have control over.”
Inflation aside, he said real estate tends to appreciate over time, but there have been notable periods where property values have declined.
“This means that selling a home in retirement does not guarantee a profitable return, as it is impossible to time the market for any investment or good to guarantee a return,” he said. “Especially if the property requires significant updates to meet current market standards.”
He said this is usually the case for holds sold by retirees. “They are often marketed as fixer-uppers or outdated, so they are in need of cosmetic and mechanical improvements … which can further diminish the market value of a home upon sale and minimize the actual take-home profit, if any.”
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Mortgage Payments (If Not Paid Off)
“Financial burdens can also arise if the homeowner still has a mortgage in retirement, with continued interest payments,” Kukwa said. “The total cost of owning a home including interest, maintenance, taxes and other expenses, can divert funds that could have been better invested elsewhere or reserved for medical care during retirement.”
He said this can be problematic for a variety of reasons.
“This financial strain is a key reason why some homes face foreclosure in the later stages of ownership,” he said. “[This can lead to] abandonment, hoarding situations, or repossession by the bank or immediate family due to an inability to keep up with payments or maintenance by an older homeowner.”
Maintenance Costs
“Despite the common narrative that owning a home is always a wise financial move, homeownership comes with significant ongoing costs, particularly in retirement,” Kukwa said. “These include property taxes, HOA fees — if any — insurance, and maintenance, all of which tend to rise over time.”
After the mortgage is paid off, these expenses continue, which can become a financial strain for retirees. “If the mortgage is paid off before retirement, maintaining the home to a livable standard remains a significant physical, emotional, and financial challenge,” he said. “Hiring help for upkeep can lead to additional costs.”
Additionally, falling behind on maintenance can be costly in other ways. “Failing to meet municipal or neighborhood standards may result in fines from townships and cities,” he said. “[This] is a reason many retirees are forced to sell their homes to access any remaining equity, relieving financial pressure but often at a cost.”
Cost To Sell
“While a home is an asset, it is not an easily liquid one, and converting it to cash involves costs, taxes and fees,” Kukwa said. “Depending on the state, there may be transfer taxes and additional taxes if the home sells above a certain price point.”
Plus, it’s usually necessary to hire professionals to assist with the selling process.
“Sales fees — including commissions and legal costs — also apply if using an agent, attorneys or title company, which many do as they are unfamiliar with the process to it themselves,” he said. “All these factors should be carefully considered to determine if homeownership is right for you, particularly if you plan to hold onto the home in retirement.”
Poor Layout
“One of the greatest challenges will be the condition of the home and also its layout,” said Nikki Beauchamp NYRS, associate broker at Sotheby’s International Realty in New York City.
Layout is important, as it’s not uncommon for retirees to prefer a space without stairs.
“I recently aided clients with the decision to rightsize to a home that required substantially less upkeep and was all on one level,” she said. “They were able to sell a home that was owned outright and roll part of the proceeds to the purchase of a new home that will be ideal for this last quarter of their lives.”
An ideal retirement floorplan isn’t necessarily the same as one best suited for a family, so a move in your golden years could make the most sense.
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This article originally appeared on GOBankingRates.com: 5 Reasons a ‘Forever Home’ Mindset Could Be a Headache in Retirement
