It is not uncommon for young people to buy a property and declare it their “forever home.” However, this is easier said than done.
Your home should fit your lifestyle, and that will likely change over the years, so trying to stay in the same place forever may not make sense.
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“Owning a primary home can become a major challenge in retirement, contrary to the picture often painted by real estate agents, mortgage brokers and land registry clerks in the real estate industry,” said Lukasz Kukwa, a real estate consultant with eXp Realty in New Jersey. “These professionals may promote the idea that a primary home is an excellent long-term investment, but this is usually self-serving advice that fails to consider the pros and cons of each scenario.”
He said that in reality, there is no such thing as a forever home and a primary residence should not be viewed as 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 you factor the cost of ownership — along with standard inflation — into the equation over time, the equity or gain is a crapshoot or at or near zero.”
Ultimately, he said, your primary residence is a place for personal use, not a source of income or profit. Here are five reasons why the thought of staying home forever might be a headache in retirement.
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Market fluctuations
“The real estate market is volatile, just like any other market,” Kukwa said. “Economic conditions, interest rates, and supply and demand affect property values over time, and that’s something we as homeowners or consumers have no control over.”
Aside from inflation, he said, real estate tends to increase in value over time, but there have been notable periods when 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 an investment or asset in a way that guarantees a return,” he said. “Especially if the property requires significant renovations to meet current market standards.”
He said this is usually the case with homes sold by retirees. “They are often marketed as needing renovation or being outdated and therefore needing cosmetic and mechanical improvements… which can further reduce the market value of a home when it is sold and minimize the actual net gain, if any.”
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Mortgage payments (if not paid off)
“Financial stress can also arise if the homeowner still has a mortgage with ongoing interest payments in retirement,” Kukwa said. “The total cost of homeownership, including interest, maintenance, taxes and other expenses, can tie up funds that could be better invested elsewhere or set aside for medical care in retirement.”
He said this could be problematic for a number of reasons.
“This financial burden is a major reason some homes are foreclosed on in the later stages of ownership,” he said. “(This can lead to) abandonment, hoarding or foreclosure by the bank or immediate family because an elderly homeowner can no longer keep up with payments or maintenance.”
Maintenance costs
“Despite the popular belief that owning a home is always a smart financial decision, owning a home comes with significant ongoing costs, especially in retirement,” Kukwa said. “These include property taxes, HOA fees – if you have them – insurance and maintenance, all of which tend to increase over time.”
Even after the mortgage is paid off, these costs continue to accrue, which can be a financial burden for retirees. “If the mortgage is paid off before retirement, keeping the home in a livable condition remains a significant physical, emotional and financial challenge,” he said. “Hiring a helper to do maintenance can add additional costs.”
In addition, falling behind on maintenance can be costly in other ways. “Failure to meet municipal or neighborhood standards can result in fines from municipalities and cities,” he said. “(This) is one reason why many retirees are forced to sell their homes to access the remaining equity. This alleviates financial pressure, but often comes at a price.”
Selling costs
“While a home is an asset, it is not easily liquidated, and converting it into cash involves costs, taxes and fees,” Kukwa said. “Depending on the state, there may be transfer taxes and additional taxes if the home is sold above a certain price.”
In addition, it is usually necessary to hire professionals to assist in the sales process.
“Selling fees – including commissions and legal fees – also apply if you use a realtor, attorney or title company, which many do because they are unfamiliar with the process itself,” he said. “All of these factors should be carefully considered to determine if homeownership is right for you, especially if you plan to keep the home in retirement.”
Bad layout
“One of the biggest 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.
The room layout is important because retirees often prefer a room without stairs.
“I recently helped clients choose a home that required significantly less maintenance and was all on one level,” she said. “They were able to sell a home that they owned outright and put some of the proceeds toward purchasing a new home that was ideal for this last quarter of their lives.”
The ideal floor plan for retirement isn’t necessarily the same one that’s best for a family, so moving in your golden years may make the most sense.
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This article originally appeared on GOBankingRates.com: 5 Reasons the Forever Home Setting Could Be a Headache in Retirement
