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Planning Ahead, But How Far?


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February 07, 2006

Planning Ahead, But How Far?

Toddi Gutner

I’ve got cold feet. Maybe this blog can warm them. My husband and I are 44 and 45, respectively, and we’re starting to think about where we want to spend our time from age 55 and up. Santa Fe comes to our minds. We love the mountains and we ski, bike and hike.

I saw a friend over the weekend who divides her time between Santa Fe and Washington, D.C. She said we can still get a small house on 2-3 acres just outside Santa Fe for $300K or so, but not for long.

I’m not necessarily talking about buying a vacation home because I don’t want to limit family vacations to Santa Fe. I’m talking about buying a home in advance of an anticipated need and before the prices run up. We all know, you can’t time the market but I think it is a no-brainer that places like Santa Fe will have a rise in real estate prices as fit baby boomers retire.

Of course, I haven’t done the research because as I said, I still have cold feet, but I wonder: When is the right time to plan and invest for that empty-nest stage in your life? Is it 45, when it would be a bit of a financial stretch now, but in ten years who knows what will be available? Or do you wait until it is time to move?

01:50 PM

Investing in Real Estate

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I believe it makes sense to buy that piece of real estate. However, instead of buying a house, I suggest just buying the land. In this way, you don't have to manage the headaches of a house from a remote location, yet participate in the upside of a real estate investment. Furthermore, you can build the house to your specifications when you're ready. Lastly, remember that real estate is illiquid. Make sure you don't need the money anytime soon.

Posted by: NB at February 8, 2006 08:13 AM

10 years is a long time and your whole value system could change within that timeframe. You might decide that you want to retire to Montana instead or you might stay in the northeast for family reasons. Who knows?

Even if I were 100% certain that I wanted to live in NM in 2016 I would have a hard time justifying any purchase if it would stretch my budget. Considering the fulcrum that housing is resting on right now it's really a gamble. It's not the "cannot lose" proposition that it was a couple of years ago.

I agree with NB. Don't purchase a house, get land if you decide to take the plunge. When you're ready to retire you will have to remodel the entire thing even on a new house since granite will look 2005 in 2016 (If that kind of fashionability is your style).

Posted by: Wes at February 8, 2006 11:21 AM

I have a little different spin then the other distinquished commentors.

I say buy a house now IF:

1.) You can afford it.

2.) You are willing to commit to an area for at least 5 years.

3.) New Mexico is a hot spot demographically for Baby Boomers. There will be a flood of them to help stabilize downward pressures over time.

4.) Consider using the equity in your home to make the purchase if you can. Leave your cash in the market to grow. The return on the equity in your home is ZERO. You can put it to work in this fashion.

5.) I like to keep 50% of my net worth in real estate. Strategically placed second homes has been BY FAR my best financial asset.

I am 49 years old and faced a similar question 4 years ago. We were fairly confident that Scottsdale was a place that we wanted to "park" ourselves someday.

I also did a ton of research and learned that Scottsdale is VERY high on the list for Baby Boomer migrations. I decided that I wanted to be ahead of this curve and made the plunge.

We were rewarded very well with this stategy and we also have a beautiful place to visit. We also allow friends and clients to use the place as well.

A few of my clients, who have made the "early plunge", decided to rent thier homes out to snow birds during the winter months to help supplement the expense.

I feel pretty good about this decision. If I had to make the decision today, I would still do it and recommend to my clients to do likewise, within the restraints listed above.

I understand that Scottsdale has had a run up in prices in the last year, (thank you very much), but I believe that in the next 5-7 years I will likely see another doubling of the value of my Scottsdale property.

Posted by: David Porter at February 8, 2006 03:49 PM

Wes & NB are right on target about the headaches of managing property long distance as well buying land now in anticipation of your upcoming 10 year retirement house need.

My husband and myself 47 and 47 respectively, have been doing the Tucson, AZ second home and Chicago, IL primary home thing for 3 years now and feel now is the time to let go of the AZ home; realize our gains, buy land, invest the rest and in 15 years build our retirement home. Aside from not having the burden of the yearly cost of the second home, we are now in a recorreted 'o6 real estate market wherin the yearly percent gains may not cover the those costs.

Additionaly one does not know what thier health may be that 10-15 year time frame.

Posted by: Carol at February 8, 2006 09:05 PM

Toddi, You mentioned that you would want to use the house in 10 years. That will also be around the time that your kids will be heading off to college. Will you really want to part with a huge chunk of money at the same time that you're writing those tuition checks? Having some additional equity might also be nice. And, one more thought -- it's not always a bad thing to limit (at least a little) vacation flexibility -- there's something to be said for setting down roots. On the other hand, if you are more the wandering type, would you really want to limit your choices 10 years from now (or beyond)? Perhaps settling down won't be your style, even in retirement! (Full disclosure: my husband and I bought a vacation home 2 years ago with the plan to use it as our retirement home in 10-15 years or so -- so the results of our mental gymnastics on this topic are clear! But, the house is closer to us than Santa Fe is to NYC, and we use it regularly now. Also, the house-management-at-a-distance problem is real, as I could readily share with a panoply of examples!)

Something else just occurred to me, have you considered investing in some property now that you would use regularly over the next 10 years or so (like a ski place -- maybe a timeshare that could be used in winter (for skiing) and summer (for hiking)), then flipping it when you're ready for Sante Fe? The timeshare thought could also appease the wanderer in you because those can often be traded. Just throwing some things out -- maybe something will warm your feet!

Posted by: Laura at February 16, 2006 09:18 AM

I would suggest as a senior citizen, retired and owning a piece of property on a bluff over Lake Michigan to go for the land ( less taxes to pay), and it will only go up in value as the years go by. You can always sell if you decide later that you want a different area to live in. I know many people who are interested in the Santa Fe area, so I say, If you can afford a lot now, go for it.

Posted by: Mary Ann Kiesler at February 16, 2006 10:46 AM

I'm a Westerner who has seen those "expensive" $100K houses selling for $600K+ 20 years later in many towns like Santa Fe, Boulder, Sedona, and Tucson. If you are looking for your dream house in Santa Fe and think gas will be $5 a gallon, then I suggest you look for the most expensive place you can afford within 1 mile of the Plaza. Between S. Santa Fe and the Pueblos you now have sprawl. If you don't mind mediocre sprawl, then go for it. The next charming SW village to the south is Corrales- next to Albuquerque but 40 minutes to Santa fe too. No crime, a Spanish history and charm- the best of both worlds. Chimayo and northen villages are nice too, but always research the crime rate.

Options in town include management firms that will get you some rental income, renting it yourself and taking writeoffs to visit Santa Fe, or leaving it vacant which makes little sense for 10 years unless you can afford it.

But a charming historical property in any western town with class- especially the arts haven centers of Santa Fe, Tucson, etc. will always be a good bet and will likely perform well over the next 10-20 years. So will "transit oriented developments" in places like old downtown Denver, Boulder, and Arvada Colorado.

The future of all suburbs is tied to energy prices and technology, and could be harder to rent and sell, especially in endless burbs like those out past Cerrillos.

Posted by: Gerry at February 17, 2006 11:06 PM

Lessons:

1. Know your goals and desires, your financial capabilities, and do some economic and growth trend research. Do you really need 2800 square feet that sits there 10 month a year? Do you want the rental income and tax writeoff ffor active or passive management? City, town or countryside (do you LIKE people and services nearby or prefer peace and solitude. Can you drive to where you need to go 10, 20, 30 or 40 years from now? Will your edge village be congested and urban?

2. Stay in the place you want to buy for at least a week in at least 2 of the 4 seasons and interact with the locals. Do you like what you see and hear? Ask questions. Look for bars on windows and gang grafitti, potholes and pawn shops hiding behind those charming and scenic streets and byways. Check and monitor local and state economic development websites and local papers, not sales-oriented property or chamber of commerce sites. Look for statistical trends in crime, taxes, service quality, weather, school quality, and comments on traffic and lifestyle options that are important to you. Look beyond "placed rated" sites. See what the rental market is doing- a lot of listings or none? Is there a large visitor section in the local paper? Read the phone book at the library- Do you see more health spas or bail bond agents?

3. Once you have closed in on a locale or two , interview at least 3 local agents and select a buyers agent with management company contacts. then wait, and see what you are getting before you commit.

Its easier to wait and pay a bit more than buy the wrong place in a hurry and discover the noisy go-cart track or fire station on the other side of the block, or discover that the town has a crime problem and have to sell.

4. Just for kicks, go online and get a Zestimation".

Posted by: Gerry at February 17, 2006 11:24 PM

David suggests that the housing prices there will double in 5 to 7 years. Historically the stock market has doubled about ever 7 years too. (That's what the 10% rate of return works out to.) Essentially you are talking about making a leveraged investment. It doesn't matter if you buy land where you are going to retire, Stock in a company, or start your own business, there is a risk/return ratio you have to decide if you are comfortable with. Buying that land would be no different than re-mortgaging your current home and investing the money in a Vanguard Total Stock Market Index fund. I take that back; the Total Market Fund in extremely diversified, the land isn't.

Posted by: Joe at February 21, 2006 01:40 PM


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