This One’s On The House

We get a lot of questions about how the house (or houses) fit into retirement plans. From downsizing to rental properties to interest rates, let’s explore some of the top retirement questions as it relates to all things housing.

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Transcript Of Today's Show:

Marc: Hey, everybody. Welcome into this edition of Plan With the Tax Man. Thanks so much for hanging out with Tony and myself as we talk investing, finance, and retirement. And this week, well it's on the house. We're going to actually talk about the house and how it fits into retirement plans. But first Tony, what's up my friend, how are you?

 

Tony: I am fantastic. Although it's getting cold here. It's in the fifties and raining.

 

Marc: Man, I'd say it's a crazy week. My in laws live in the Wyoming area. And of course, I don't know if you saw this or not, but obviously Colorado got in the corner there and they got eight inches of snow. They can see the fires and they got eight inches of snow. Crazy.

 

Tony: Yeah, yeah. It's definitely a weird weather pattern, we got going right now.

 

Marc: That 2020 Bingo card as you and I were talking before we started. No one could have guessed some of the things, we had dueling hurricanes this year, they call it a hurricane square dance. They might touch each other and spin around. And we had the weird thing that happened there in Iowa that no one has ever heard of before. So, just crazy. And then of course, obviously, all the other stuff that we don't need to get into, because everyone knows about it, but it's just been a wild, wild year.

 

Tony: Definitely.

 

Marc: So, we're going to simplify it and just talk about our house. How about that?

 

Tony: That sounds good.

 

Marc: We get tons of questions all the time.

 

Tony: I love talking about houses.

 

Marc: Well, we get tons of questions about them, right? So let's just talk about it a little bit, whether you're thinking about downsizing, or you're thinking about how does it fit into your legacy plans, or do you want to have rental properties, or whatever the case might be. Let's just explore some top questions that relate to the home. So Tony, where do you fall on the debate of pay it off, pay off the house as soon as possible going into or in retirement or leading up to it or whatever, or with all the interest rates that we've seen, really low this year, a lot of people re-fi'd, maybe keeping the mortgage and paying it off slowly. Where do you stand on that debate?

 

Tony: Yeah, I'm a big believer, and there is a debate, and I love to argue with clients about this and actually show them the math. But the old adage is, well, you have a house, you can't obviously pay it off, many can't, all at once, in cash. So you take out a mortgage and you, of course, you can write off the interest, for your taxes. And with today's low rates, that's even more attractive because obviously, it makes for the fact that people can maybe afford more or keep their payments low. But I'm a big believer, I'm a Dave Ramsey disciple on this, I always suggest trying to get out of all debt and staying out of all debt at all costs. And so if you're asking me, I have my own house paid off, it was such a great deal when that happened and I never want to have a mortgage again.

 

Tony: But that being said, you can't just do it all, in over the course of two to five years for most. So I definitely would work toward that goal. Maybe pay a little extra toward the mortgage to maybe get it paid off a little sooner than you had originally planned and take advantage of low rates while you can. But I always tell people, here's what I tell them, I said, I ask them, "How much is your house payment?" Somebody might blurt out, "A thousand dollars a month." And I say, "Okay, so that's $12,000 a year that's costing you, out of your pocket, for a tax deduction, if you can even take it. And let's say just round numbers, they're in the 20% tax bracket, for a $4,000 deduction. So which would you rather have at the end of the year, 12,000 or 4,000?" Of course they always say 12. I say, "Then you need to pay off your house and then you got an instant raise," but that's not possible, again, just being able to go out and do it over- [crosstalk 00:03:36].

 

Marc: Right. Well, and as we get closer to retirement, people do, definitely early on, but let's say you're anywhere from two to eight years out, sometimes people are in that position where they do wrestle with that classic debate. "Well, I got it sitting there. Do I go ahead and do it? And then what is it saying? I'm house rich and cash poor, or do I want to hang onto it as an additional emergency fund?" And certainly 2020 has probably made a lot of people go, "I want to hang on to it. Just in case something wonky comes out of the blue." So I don't guess there's a right or wrong answer a lot of times Tony, I know there's the math answer, but then as you pointed out, there's also what I call the tummy rule. If it just makes you feel better and helps you sleep at night and settles your stomach down to have it gone, then maybe that's the avenue you take, regardless of the math.

 

Tony: Yes. And it is. And, but boy, the tummy rule definitely feels good once you're going to be able to do it. My philosophy is, get all the other stuff paid off first. The house would be the last thing, because obviously the rates are low. You can still deduct it potentially. And then just work towards it. And then hopefully by, or a little bit before retirement, you maybe can have that paid off if everything else is going well.

 

Marc: Yeah. Okay. Well again, folks, so wherever you stand on that debate, and if you have that question on your own mind, "Hey, is it better to have it gone before we get into retirement, or as soon as we can in retirement, or to keep it?" Every situation is a little different. Always just talk with your advisor and see. But I guess if you have to have it, like you said, in order to not feel too beat up, and you shouldn't, that's for sure, it's what we call good debt. So it's much better than having some crazy credit card debt.

 

Tony: Yes. Absolutely.

 

Marc: All right. So let's go to the downsize question, Tony. Now this one also can be emotional because some people really want to stay in the home, but maybe they've been there 20, 30, 40 years, 50 years, they've raised the kids. They want to have all that, but there are lots of reasons, both math and economic, but also maybe health and other things to consider downsizing.

 

Tony: It is. Downsizing is tremendously emotional. And this is almost impossible to just say, other than my own personal opinion, but it's changed a lot since I'm getting a little older, back when I was young, I wanted a bigger house, in retirement, I wanted to be able to have all this room. Now that it's really starting to get a little closer, some things creep in and why do you need all that room, and whatnot? But the rationale sometimes there is well, maybe we should downsize. Maybe we have more home that we need-

 

Marc: Maintenance, maybe, right? [crosstalk 00:06:07]. Maybe there's a maintenance thing.

 

Tony: Yeah, maintenance is becoming an issue and just don't want to mess with it, with the time we have left, maybe we downsize a little bit and still get something comfortable. And some of it, sometimes, it has to do with money. Generally, the clients we work with, generally not, they just are looking for something a little smaller, less maintenance, less worry. And again, as we age, many of the clients are looking for everything on the same level.

 

Marc: Right.

 

Tony: Because they can't go up and down stairs.

 

Marc: Yeah. The knees can't take it anymore. Well, and I imagine that opens up some interesting, because we just talked about paying off the house, but if you're looking to downsize in retirement, there's some people listening saying, "Well, now I'm going to have a mortgage again." Now it depends on the situation you come out of if you sell the prior home, but it is a possibility, right?

 

Tony: It is a possibility. They may have a mortgage if you didn't have the other one paid off or still owed quite a bit on it because if you sell it and make a little bit of money, you're going to end up probably dumping that money into the new one and maybe taking out a mortgage. But if you own it or are close to the one you're selling, that really isn't an issue, but I'll share a story. I just had it with a client.

 

Marc: Sure.

 

Tony: He's relatively young. And his kids, who are relatively young. So he's in his fifties, his kids are in their late twenties, early thirties. And he decided he didn't want a home anymore. And he owned it. And he bought a condo. And a very nice condo, I would say luxury for sure. But you know what he didn't think about is, he didn't think about and he's already kicking himself, that what happens when my kids started having kids and my grandkids want to come over? I really don't have anywhere to even go play.

 

Marc: Right.

 

Tony: And so there's a lot of issues to think about there.

 

Marc: Absolutely.

 

Tony: I think about that. And so you just got to talk it out, see what's best for you and try to make the best decision there, but, no right or wrong answer there for sure.

 

Marc: Well, and I think a lot of times, if health is dictating it or whatever, again, have these conversations also not only with your partner, your spouse, but also with your advisor, because they might be able to shed some light on some tax situations or whatever the case might be when it comes to maybe switching from the home you used to have to the smaller one or whatever the case might be. So these are all good questions to think about when it comes to this component, which is also a pretty big component to your overall retirement plans. All right, so now some folks really like the idea of rental property. We've obviously had this fad for a while now, people wanting to get into flipping houses and all that stuff, but a lot of people think it's a good idea to have rental property as a source of creating income in retirement. How do you feel about that and what are some things to think about?

 

Tony: Well, I'm definitely biased here because we have owned rentals for probably 27 years. And we started out back in the day when I didn't have many clients and we basically had nothing to do. And so we learned it from our dad and we helped him with his rentals and then started acquiring our own. These days, now, we have multifamily housing. So we used to have single family dwellings. But our dream was always to own them until retirement and creating income in retirement. I think it's a good idea if you know what's involved, because people come to me during tax season and say, "Well, you guys have got a lot of rentals. Tell us about them. It sure looks easy."

 

Marc: Until you've had a rental.

 

Tony: It's not. Until you have them. It's definitely not out... Like you're owning a retail, brick and mortar business, but if you have say, a single family dwelling or a few of them, I think the biggest thing you got to understand is, there is some work involved. There is some time involved in how physically able, or how much time do you want to spend at it in retirement?

 

Marc: Right. Well, I think some- [crosstalk 00:09:54].

 

Tony: Generally... Oh, go ahead.

 

Marc: I think some people, Tony, I'm sorry, I think some people go into it thinking, A, it's good for income B, maybe they're handy and they think this is a good way to stay active because we can work on the house. But you do have to think about, as you continue to age, do you want to be on a roof? Or do you want those 2:00 AM toilet calls? Or whatever that case might be, right?

 

Tony: Or worse, when you get the call or you have to basically kick somebody out or they're moving out and they've destroyed the place. And the biggest thing that I tell people that want to know about it is, I tell them, you have to understand and come up with an amount of net profit you need every single month. And then eventually, things happen. And you have to put a little money aside because every once in awhile, something's going to go out and you don't want to have to constantly dip in your own pocket to repair a furnace or worse.

 

Marc: Sure.

 

Tony: And what we used to do is we used to go in, and back in our rookie days, I call it. You buy a house, you think, "Well, we're going to net $200 a month on this." We were ecstatic.

 

Marc: That's great, yeah.

 

Tony: Yeah. 12 months go by and that's only $2,400 and that's after everything, but you have one major repair or you have one person that destroys your property. You just destroyed your net income for maybe two to three years. And then, now you're behind the eight ball. And so you got to think about those kind of things and you got to make sure you buy it right, you rent it right. And so there's a little bit of work to it, but it can create a nice income of semi passive, I guess I should say.

 

Marc: Well, and maybe you want to go the route of a property manager, just again, factor that into the budget, right? Because that's going to come out of what you're expecting to get for that rental income to pay someone else to manage all that for you.

 

Tony: True. And most of the time though, we found, as clients and perspective clients want to talk to us about this. If you're only going to have one or two rentals, especially single families, property managers, although they're good, they're going to eat so much of your profit up, then you're back down to, there's not enough there, but as you acquire more, they're definitely worthwhile. We manage our own now, we're our own property management company, but back in the day, we were like that, we were the handyman, we were everything.

 

Marc: Oh yeah, no.

 

Tony: It was great.

 

Marc: And again, and it could be something you enjoy doing. There's a lot of people that like that kind of stuff, but just be prepared to deal with some of the negatives and unfortunately, it just is what it is. Typically, not all renters, but I would say more than half probably, if you were going to weigh this out, they're just not going to treat it as though it's their own place, right? That's the whole... So you do run into snags where you're going to have some bad tenants from time to time and it's going to cost you. So just make sure you're prepared for all that.

 

Tony: Yes.

 

Marc: All right, so then final one here to wrap this up, then. What complications have you seen, Tony, in your many years? 23 plus years of doing stuff in handling real estate when it comes to the estate or legacy side? Now, whether it's just the family home, whether it's a family that had multiple properties, it doesn't really matter. Just some bullet points to consider when dealing with real estate and legacy.

 

Tony: Yes. And even with mainly your principal residence, what we see a lot of is everybody comes in, especially as they start aging and they immediately hear or see things and they come in and say something like, "Well, I want to get the property out of my name. I just want to title it in my kid's name." And we of course say, "Why?" And they have no answers. They just hear it. And most of the time they're concerned with potentially having, and this is just one bullet point and there's many, that they're concerned with, "Well, if I have to in a nursing home, I want them to have something," and they don't understand all the rules behind that. And there are a lot of rules behind being able to do that. But, so that's one thing.

 

Tony: Generally, people want to do that. Other people want to make sure that if they pass, everything passes directly to their spouse via ownership, contract rules versus the rules of the will.

 

Marc: Right.

 

Tony: And so there's some issues there. And then of course, when you get into legacies, if you have more than one home, maybe a vacation home or something, and you want to leave it to somebody outside of your spouse, I would definitely talk to your advisor. And of course, if I'm your advisor, I'm going to ask you, let's talk to your attorney as well, because you want to make sure that you do this stuff right, because you're talking big numbers here and a mistake trying to maybe do it yourself, or listening to somebody on Google that you don't know what kind of background they have, could be disastrous.

 

Marc: Well, let me pose a question for you, because I think a lot of times people assume that their kids are going to be good, for lack of a better term, about things when mom and dad are gone and let's just be honest, unfortunately, sometimes money and things make people get a little goofy. So planning things out ahead of time and sharing all those thoughts certainly, certainly advisable. But what do you do maybe in scenarios, and maybe you've come across this, Tony, where I haven't, but you have multiple kids and maybe one's out of state and you're talking just maybe the single family home here or whatever. And one person wants it, one person doesn't want it. Now that seems like that could be easy but I would imagine that also dividing things up or making sure that both children feel that they got equal amounts of the complete estate, maybe if one got the home or one didn't. There just seems like there could be a lot of moving parts that it's better off to iron those things out earlier on, I would assume.

 

Tony: Definitely so. And we see it in these parts, even though we're in the capital city, but we have a lot of clients that own farmland and what happens when somebody passes is one of the kids is sometimes, "Well, I'm out here, I'm farming right now. So I want all this. I want to keep doing what mom and dad have done for all these years." The other kids are in the cities or in different states saying-

 

Marc: Could care less, right?

 

Tony: Yeah. "Well, we just want our cut, because we're not there." And the person back here saying, "Well, I don't have the cut to give you because I still want to do it."

 

Marc: Right.

 

Tony: So that's an issue, but yes, there's a lot of second and third marriages, we have problems with, too.

 

Marc: True, yeah.

 

Tony: Kids from the original marriage don't want dad to give the house that they grew up in to the second wife and just all kinds of issues.

 

Marc: Yeah.

 

Tony: So definitely, you got to do some talking through. It starts though with, I think, an honest sit down with your attorney and possibly your other advisors to iron out what you really want, just to make sure that everything's all very cut and dry.

 

Marc: And depending on the situation, Tony, I imagine then that's when you get this team together, you sit down with your financial advisor, like yourself, you bring in an estate attorney or an elder law attorney, something like that. And you go through and figure out what your wishes are and do you need a trust to make that happen? Or do you need a will? And make sure your BDs are correct. Whatever the case is and just go through all those steps. And then as an EA and a CFP, you're also able to say, "Okay, from a tax standpoint and things like that, let's look at this or that or the other, as well."

 

Tony: Correct. Yeah. Because there are some tax ramifications in there that as you pass this property around, there are some cost basis and gain considerations. And so you just got to think it through, and then you got to be able to go back to the team as needs change because, just because you set up something today, doesn't mean 10 years from now you can't change it.

 

Marc: Sure.

 

Tony: In fact, I'm going out with our own attorney at the end of this month. And we're making a slight change to our buy/sell agreement. It's always could be changed, but you just got to get started and make sure you're doing it properly.

 

Marc: Right. Absolutely. And that's the key, getting started. So we're going to wrap it up this week, here. So that was our conversation about the house. If you are already a client of Tony's and you've already addressed these things, you're thinking, "Well, that doesn't apply to me." Well, maybe you know somebody who does, maybe you've got a friend or a family member that could use the message as well, share the podcast with them and you could do so at yourplanningpros.com. That's yourplanningpros.com. If you haven't subscribed to us yet, go ahead and do so or let whomever you share that with know the same thing. There's lots of easy ways to do it on whatever platform you like, Apple, Google, Spotify, although Google is changing. I think it's going to be Google Podcasts now.

 

Tony: I heard, yeah.

 

Marc: I think they're switching as well. So I think we'll be coming to Amazon Audible soon as well. So just lots of ways for you to get playing with the tax man and get some content from us. And we certainly hope that you enjoy it and appreciate it. But if you do have questions, you do need some help or know someone does and is in a situation where they need to make a move, before you take any action, you should always check with a qualified professional, like Tony and his team. So reach out to them at (844) 707-7381. That's (844) 707-7381, he's right here in the central Iowa area at Tax Doctor, inc. So give him a call and check him out.

 

Marc: And Tony, my friend, thank you so much for your time. I hope you have a wonderful couple of weeks and I'll talk to you soon.

 

Tony: All right. Thank you, Mark.

 

Marc: We'll catch you next time here, folks, on Plan With the Tax Man. Don't forget, subscribe to us at yourplanningpros.com.