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Rent or Buy In Retirement?
Question: We’re selling our home and buying in an independent-living retirement community, but what is the best way to buy? Duplexes have two bedrooms, two bathrooms, a laundry room and a two-car garage. The services include all utilities except phone and Internet, housekeeping (4 hours per month), complete home maintenance, lawn care, snow removal, activity programs, real estate taxes, property insurance and transportation. You can get breakfast free but lunch and dinner are extra.
You can rent for $2,513 month or you can buy. If you buy the cost is $164,000 and when you leave 90 percent of the selling price will be refunded in 120 days. If you buy they also charge $1,200 a month for the same services listed above.
Answer: Regardless of how you buy, the property and services are the same. The options are a $2,513 rental rate or $1,200 per month if you buy. If you buy you pay $164,000, and when you leave you get back $147,600. This arrangement raises three points:
1. If you buy you save $1,313 per month, or $15,756 per year. In effect, the rate of return on your $164,000 investment is 9.6 percent, but because there’s no income tax on a “savings,” the real rate of return after taxes is actually higher. In today’s world this is an exceptional return.
However, you need to ask: Is there something better you can do with the $164,000 purchase price? Invest elsewhere, help family members, buy a business, etc?
2. You’re not really a real estate buyer, or an “investor.” If the value of the property goes up you can never benefit from the higher price and greater equity, but then you also have a downside protection if values fall. No matter what happens you will lose $16,400 ($164,000 less $147,600) when the property is returned to the community.
In an ideal world you don’t want to lose anything. In this case the trick is longevity. If you live in the property for at least 13 months, your unit savings – $1,313 per month – will equal the built-in loss. After 13 months your $164,000 investment will begin to generate a real return.
3. The investment money will be returned within 120 days. Why 120 days? Because the retirement community hopes to fix-up and repair your unit and re-sell it within that time frame. With any luck the new renter/buyer will bring enough cash to cover the $147,000 owed to your account. If the new folks rent that’s fine, too, because their monthly fee will more than off-set the income you now represent.
Is there anything “wrong” with this arrangement? No, it’s simply the mechanics of the deal.
To go further you at least need a will and a living will, and you want to look at tax and estate issues. For specifics, please speak with an attorney who specializes in elder law as well as a fee-only financial planner.
Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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