Tom Kelly: Know what you want; don’t let emotion drive you

I read with interest recently that more than 250 people stood in line in a Phoenix suburb to tour the latest community for buyers age 55 and older. Some wrote offers to buy a unit immediately.

Friends of friends who were there said more than 3,000 people toured the community before sales offices closed for the weekend and not all the chatter was on retirement there. Some of the people were looking to buy the homes as investment properties and rent them out to the 55-plus crowd. Others mentioned “renting it out until we’re ready to move there.”

Regardless of your age group or targeted location, it’s always best to ask yourself how the property – especially if it is not your primary residence – will be used in the next three years. The home will be viewed differently if you decide it is only for personal use and not necessarily for investment income. That’s because it’s difficult to put a price on personal comfort, experiences and memories. For now, let’s review some basics that are often overlooked in an emotional decision when it comes to a second home or a future retirement residence.

Picking your place. The three most-used words in real estate – location, location, location – are repeated for a reason. If the property will be solely a personal residence, will its style and layout hold its appreciation over the long term? Then think resale: If you had to sell it five years down the road, what would lure the next buyer? Finally, if you had to rent it out, is this the type of property that could definitely catch your eye and possible rental dollars? What appeals to you may not appeal to the rental pool you will depend upon for consistent income.

Picking your community. Even if the house is perfect, is the neighborhood one that you see yourself enjoying? Do you think most of the people you know would like it, too? Remember, you can always add a bedroom or convert a patio space, but the area is set. Again, play the dual role of renter and resident. If the parcel will eventually serve only you and your family exclusively, you need to choose a place where you will be comfortable later in life.

Finding the cash. If you’ve got some semblance of a down payment and can show the likelihood of rental income, you are in better shape than you think. Can you make the payments, however, if you simply do not want to rent? One of the biggest changes in real estate over the past three months has been a move to ease financing.

Tax is a benefit, but … While mortgage interest is deductible on second homes, it’s usually not wise to buy a home solely for tax reasons. If your property eventually becomes your primary residence, you can sell it after two years and pocket $500,000 of gain (married couple) or $250,000 (single person). Sale of an investment property would not qualify for such a generous tax treatment.

Who’s minding the store? Before you invest in this wonderful getaway, you must decide how you will handle emergencies – and possibly renters. Situations change, retirement may look better elsewhere after a couple of years and you might be amazed at the rental possibilities on a house earmarked as your final property purchase. Having tenants, short or long term, will require that the property be managed effectively. It’s a business, unless you will be the only occupants. This means maintenance and improvement, as well as simple rent collection. You will either do it yourself, or you will hire others to do it for you. Management is a cost and will diminish your cash flow. Choosing the more cost-effective approach will affect the return on your investment.

How much can you handle? Real estate that will ultimately prove a good investment because of price appreciation might be a challenge every month because of negative cash flow. You are responsible for paying for and maintaining your property regardless of whether the property is generating revenue. Before you invest, you need to create and hold a cash reserve to cover those weeks when the house is not rented, when the rent is late or when the toilet needs repair. And, how might you deal with that pressure?

Do your research and try not to buy on emotion, especially on the first day.