Home Equity/Withdrawal rates

[patnbj]

Lately I have been thinking about the potential impact of home ownership can have on one's safe withdrawal rate. We all know that a paid-off house affords one lower monthly expenses, thus lowering ones withdrawal rate. But usually we do not count home equity as part of our portfolio. However over the long haul, it might make sense for a retiree sell their house and either buy a less expense one or to rent or to stay put and pull money out of the house by obtaining a reversible mortgage. I have calculated different what-if scernarios to see what impact each would have on the safe withdrawal amount. I think that I can retire on a smaller portfolio now in anticipation of receiving this income stream later. Comments?

 

[moguls]

I agree Patnjb. While a home does not generate any income and isn't being considered as part of my initial portfolio, I am including the projected sale of my home 15 - 20 years or so after early retirement as part of my plan. I'm using very conservative numbers to value the property and could sell it earlier if required.

Dory36's FIRECalc is a great tool for estimating the impact of this alternative.

Moguls

 

[dory36]

When I did my own calculations, I did as you are doing (both patnbj and moguls). I factored in an income stream from a seller-financed property we sold a while back, a future social security income stream, and a couple of lump sums from property sales down the road. It made a tremendous difference!

If the income stream is reasonably predictable (and I don't know how reversable mortgage work -- do they lock in a rate now, or is it adjustable), then the impact is 25 to 1 -- for every dollar in annual income you get, that's $25 you don't need in your portfolio.

Of course, the same goes for expense reduction -- for every dollar a year you don't need to spend, that's another $25 you don't need in your portfolio.

Dory36, now in Florida and cruising down to watch the space shuttle launch this weekend

 

[patnbj]

Here's a link to a website that explains how reverse mortgages work.

http://www.reversemortgage.org/

 

[CC]

I've been considering lately whether a paid off home is actually that beneficial in terms of RE. When you consider all of the "hidden" costs of home ownership even though the home is paid for, I'm not so sure renting isn't the way to go.

Any thoughts?

CC

 

[wabmester]

I agree that renting makes a lot of sense, especially in this housing market. Unless you're pretty certain that your home will appreciate, the maintenance costs, property taxes, loan interest, closing costs (at both buying and selling times), and insurance costs will bite you hard.

 

[cute fuzzy bunny]

I'd have a hard time finding a rental property that would allow two dogs and three cats Plus I'd hate to have a landlord that could alter my monthly costs or sell the property out from under me...I hate moving.

I figured the house to be a tappable resource. Either by home equity line of credit, or to be sold when I'm older to replenish the portfolio.

Renting might feel better to me when I'm 20-30 years older. Right now doing a little work around the place and having some of my money "out of the game" so to speak is a benefit to me. I'm avoiding hefty maintenance by having bought a largely low maintenance property.

Not to mention my real estate transactions have produced some hefty returns...a 50k return on holding a property for two years, a 280k return on 7 years, and I'm about to make 100k on a house I've had for a couple of years. Those numbers are all after closing costs. Roughly a 15% annualized return on my "investment".

Clearly being able to make money like this depends on what housing market you live in and how those continue to produce in the future.

 

[John Galt]

I rented for 3 years after I ERed, but I was single then.
Worked out fine. With the two of us and 4 dogs,
renting was tricky, but I did look into it. Now, with our house and all
of the real estate we own, if we excluded it from our
portfolio, there would not be much left

This investment (real estate) is all debt free and so can be easily used to free up cash, in a whole variety of
ways. For example, let's say all my other investments
went to zero (the worst-worst case scenario). We could
still make it with just the real estate and SS, assuming we got
a reverse mortgage. BTW, the most readable
information I've seen on reverse mortgages is in a
booklet put out by AARP. I just got mine. Excellent!

John Galt

 

[Cut-Throat]

Jarhead,

Inertia is a powerful force! - The way I look at it - You have a large chunk of money invested in real estate. If you sold your home, you would have to invest it elsewhere.

If you're happy - I'd stay. - You can always get a reverse mortgage down the road. Also, your house will probably continue to appreciate - So you've got the best of both worlds. You are invested and you like your home. I'd only move if you did not like where you lived or just could not handle the taxes and maintenance.

 

[wabmester]

Am I the only one who thinks property taxes are the most evil invention ever concocted? Who is the guy who came up with this idea?

"Hey, let's tax people on what they own for as long as they own it, regardless of their income or ability to pay. And let's increase the tax as the value of their property increases even if they have no way of taking advantage of that appreciation unless they get rid of it!"

BTW, Jarhead, I know exactly how you feel about leaving a place you love. I'm on the fence with our place. We recently bought another home as an investment, but we like the new location so much, we're considering moving.

Which would you choose?

Current residence: 3500 sq ft hand-crafted timberframe in a forested area with total privacy and a filtered view of the water.

Potentially new residence: 2000 sq ft of sturdy but uninspired stick-built house with no trees in sight, no privacy, but right on the water with the most incredible views in the state.

We like them both enough that we might just switch back and forth every couple of years

 

[John Galt]

My dad complains about property taxes all the time.
He says, "You finally get the house paid off and then
you rent it from the county!" Some truth there.

John Galt

 

[Jarhead*]

Cutthroat:
Thanks for reinforcing my decision. (We all need a little hand holding from time to time).
I can"t remember the exact circumstance, but strangely, I remember telling you that if you love where you're living, then there's no reason to sell. Do you remember what that convesrsation was about? In any case, I remember posting it to you.
Wabmaster: Sounds like you have a situation that would be an envy of lots of folks.
Regarding view of the water. What water, and what state do you live in?
Living in northern Calif. as I do, Prop 13 makes it especially tempting to stay put.
How would you make out with taxes on the move?
I have a feeling in years to come, property taxes will play a much larger role in those type of decisions.
Age also plays a pretty good sized role.
I know how to get home now after a fishing trip, and can't guarantee that I could find new housing
Regards, Jarhead

 

[Cut-Throat]

Jarhead,

I don't think it was me, because I built this place about 6 years ago and selling it is the last thing on my mind.

I also like where I live except for Dec, Jan and Feb. - And I usually get out of town a lot during those months.

If I needed cash down the road, I would consider a reverse mortgage.

 

[wabmester]

Jarhead, we're on an island in Puget Sound (WA).  No prop 13 here, unfortunately, but that at least makes the decision to sell a little easier.

 

[unclemick]

Ah yes, those 'evil and dastardly Califorians' were in Oregon and Washington back in 93 when I sold the old house in Kelso. Good for you guys - got a decent price.