Real property can ease retirement

By PHIL MULKINS World Staff Writer - 10/28/2009


Investment in the stock market has always returned more than real estate — 12.33 percent to 5.92 percent since 1978. But that was then and this is now. Today's retirees — saddled with retirement accounts whose values have dropped, threatening their quality of life — must turn to other sources of income while waiting for their savings to recover.

Bankrate.com defines three ways to use real estate for retirement income.

Buy real property: Houses and apartment buildings are dirt cheap, and buying some to use as rental property can bring a higher return than your retirement accounts ultimately will. It all depends on the local demand for rental property, which can be driven by the college education industry and an expanding job market.

Before you buy, determine what rental prices comparable properties are fetching in the area. Add up each monthly expense: mortgage payment, insurance premium and one-twelfth of the annual property taxes. Include other expenses you're likely to pay: water, maintenance or community dues, etc. If you won't manage the property yourself, include a monthly management fee.

The total is your monthly cost — the minimum amount you'll have to receive as rent just to break even on owning the property. See a guide on this in the Sept. 29 Action Line at tulsaworld.com/092909.

Before you can justify the headache of owning rental property in retirement, you must

net a positive cash flow of at least 6 percent, Bankrate says.

You will also get a tax break — the Internal Revenue Service lets you depreciate the building portion of your property (minus land value) over 27.5 years, meaning much of your cash flow will be tax-deferred. When you sell it you have to pay taxes on depreciation, but if you don't sell it your heirs do not have to pay it.

Before buying, hire a certified home inspector to determine what maintenance issues you'll have.

Rent a room: Renting a room in your home adds income and is easy to do for retirees living in college towns where such rentals are in demand. Always

check applicants' credit histories and criminal backgrounds.

As with any rental, clearly state the rental terms in written leases. Generic lease forms are available in local office supply stores or online. Kitchen privileges and common area usage should also be specified clearly.

Oklahoma landlords should find out what their legal responsibilities are by reading the Oklahoma Residential Landlord and Tenant Act, at tulsaworld.com/LandlordTenantAct . Also see tulsaworld.com/Action071509 .

Check local advertisements for an idea of what room rental rates are in your area. Consider amenities that might factor into your rental rate — proximity to work or school, private entrance, pool, off-street parking, etc. These are excellent selling points that will garner a higher rent.

Reverse mortgage: Income from reverse mortgages can provide retirement income out of reach of those with small nest eggs. Before trying to extract income from real estate, a retiree needs a cost-benefit analysis to determine whether this effort is worthwhile. You must be able to utilize the asset correctly to produce the right amount of cash flow.





Reverse mortgages not for everyone

Many retirees are opting for reverse mortgages as a way to fund their retirements with their residences

A reverse mortgage, sometimes called a lifetime mortgage, is a loan that releases the property's equity as a lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves for an elderly care residence.

62 or older: If you're at least 62 and own your home or just a small mortgage, you may qualify for a reverse mortgage. The older you are, the more you can borrow: this year it is up to $625,000, depending on appraised value, your age and the current interest rate. In 2010 the amount goes back to $417,000.

Closing costs: One downside is steep closing costs and fees — thousands of dollars potentially negating their benefits. If you decide you don't want to stay in your home for the duration, reverse mortgages are not financially prudent ways to extract money from your home. Home equity loans are the cheaper option.

Three types: Homeowners can choose from three types of reverse mortgages: single-purpose reverse mortgages, proprietary reverse mortgages and FHA Home equity conversion mortgages — HECMs.

HECMs: In January, the U.S. Department of Housing and Urban Development announced a new effort called the Home Equity Conversion Mortgage for Purchase Program (tulsaworld.com/HECMs). This allows a senior citizen to purchase a new principal residence using loan proceeds from a reverse mortgage without having to sell the old residence. These account for 90 percent of all reverse mortgages, according to the National Reverse Mortgage Lenders Association ( tulsaworld.com/NRMLA ). See also tulsaworld.com/HUDHECM .

Not so hot: Reverse mortgages provide steady income streams for those who remain in their primary residences through retirement, but they have default provisions that cause owners to default on the contract when they go into a nursing home for a year or longer. For this reason, reverse mortgages are not the greatest option for most homeowners. They are for people with no other options.



Tulsa World consumer writer Phil Mulkins wants to know which topics interest you most. Call 699-8888 or e-mail your interest to phil.mulkins@TulsaWorld.com or mail it to Tulsa World Consumer, PO Box 1770, Tulsa OK 74102-1770.




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