Tag Archives: insurance

Risks and Rewards of Downsizing

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photo by Lars Plougmann

The Deseret News quoted me in Why The Young and Old Are Embracing The Rewards of Downsizing. It reads, in part,

Not very long ago, living with less implied money problems or a lack of professional success.

No longer. From younger and middle-aged professionals to retirees, more people are embracing the rewards of “downsizing” — a term that can mean anything from ridding yourself of unnecessary possessions to opting for a less spacious home.

“Downsizing your home can make sense,” said artist and designer Pablo Solomon. “You can save on energy costs, insurance, taxes and upkeep.”

But don’t cart stuff out to the dumpster or plant the “for sale” sign in the front yard just yet. First, consider the varied ways that downsizing can streamline your life.

Home, sweet (downsized) home

One of the most ready targets for would-be downsizers is their home. Perhaps they’ve recently retired and want to retire extensive upkeep responsibilities as well. By contrast, younger people might embrace the greater simplicity that can come from a home that better matches their lifestyle.

But downsizing is not the remedy for other issues, Solomon said, that need a different — and sometimes less costly — approach: “Don’t downsize to be part of a trend or fad or to escape depression or make a ‘statement,’” he said.

Approach downsizing your home as you would any sort of housing decision. Consider space, amenities and any associated costs — only from a particularly budget-conscious perspective.

“Think about the long-term needs you will have for the next 20 to 30 years. Don’t select a place to live temporarily — the costs of moving are high and the cost of buying and selling homes is also high,” said Linda P. Jones, host of the “Be Wealthy & Smart” podcast. “Think before you make a decision and be sure about the move you are making so you won’t have to do it again.”

Another way to approach downsizing a home is what Jodi Holzband of the self-storage search website Sparefoot referred to as “rightsizing” — beginning with basic living requirements and, from there, thoughtfully adding on those features that are of genuine importance.

“Focus first on your needs — essential living items like your bed, clothing and toiletries,” she said. “Then focus on what you love or value — the touchstones of life such as pictures, memorabilia from home, vacation souvenirs, high school pennants and varsity jackets. Look to the space you have and limit what you take in this second category based on space.”

Lastly, don’t ignore possible tax consequences of moving into a smaller space. For instance, retirees who have owned a home for a long time may have acccumulated a great deal of equity. As David Reiss, a professor of law at Brooklyn Law School, noted, capital gains that exceed a certain amount (generally, $250,000 for one person, $500,000 for a married couple) are taxable. Check with a tax professional to gauge your situation.

Money ‘n Trees

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tree fallen on house

Money quoted me in 4 Things to Know Before You Prune a Tree. It opens,

It turns out money does grow on trees. Mature specimens can add 10% or more to your property value, according to Greenwich, Conn., arborist and tree appraiser Scott Cullen. But trees can cost big money, too—if a giant oak falls and crushes your garage during the next big storm, for example. Here’s what you need to know about maintaining the trees on your property.

*     *     *

Understand insurance coverage

In urban and suburban neighborhoods, it’s common for trees to grow along property lines. As a general rule, the owner of the property where the tree meets the ground is the owner of the tree—and responsible for it, says real estate attorney and professor of law at Brooklyn Law School David Reiss. If you own an obviously diseased and dying tree that falls and damages a neighbor’s house or, worse, hurts someone, you could be financially liable for the damage. But in general, if it’s a healthy tree that has been routinely cared for and inspected by a professional, the owners of the property that gets damaged by your tree will likely be covered by their own insurance for damage to their buildings or vehicles.

Know your right to prune

Just as leaves and branches that fall on your land are yours to clean up, regardless of whose tree they came from, you also generally have the right to trim any part of a tree that’s on your property. So if a limb from your neighbor’s tree is bringing squirrels onto your roof or dropping walnuts onto your new car, you are within your rights to have the limb removed. You can’t cut it beyond your property line, however, and if any trimming you do were to kill the tree (or render it unstable or unhealthy), you could be liable for paying its owner for lost value.

In any case, living by the letter of the law is rarely the best solution when it comes to neighborhood relations. Discuss tree issues with all parties involved before anyone fires up a chainsaw, says Reiss. If a tree is yours—in other words, if it leaves the ground in your yard—it’s essentially your tree and your responsibility to keep properly maintained and pruned. Even if you technically aren’t responsible for shaping the limbs over on the neighbor’s side, the increased cost for doing that while a tree guy is on site is well worth the good relations it will engender. If the tree trunk splits the property line, discuss the needed tree work and ask your neighbor to split the bill.

Monday’s Adjudication Roundup

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Monday’s Adjudication Roundup

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Valuing Rental Property

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cincy Project

Money quoted me in Here’s How Much You Should Pay for a Rental Property. It opens,

Q: I want to invest in a rental property. Is there a formula I can use to determine the value of a building based on the rent it takes in?

A: One useful calculation to use is the capitalization (or “cap”) rate, which is the ratio of net rental income to the purchase price of the property, says Brooklyn Law School professor David Reiss.

Start with your gross rental income, which is simply the total of one year’s worth of rents for all of the units combined. Subtract 5% or so to account for occasional vacancies throughout the year. It’s safest to use existing rents, but you can conservatively increase the amounts if you are planning to improve the units and raise rents.

Then add up the yearly operating expenses — property taxes, insurance, utilities, plus at least 5% of gross income for a maintenance/repair fund — and subtract that from the annual income. To get your cap rate, divide that number (the net operating income) by the purchase rate.

Run the Numbers

Let’s say you’re buying a five-family house and anticipate gross annual income of $100,000. If you calculate your total annual operating expenses at $30,000, you end up with $70,000 in net operating income. For a property that cost, let’s say, $1 million, that equates to a 7% cap rate.

But is 7% a worthwhile return on your investment for the work and risk of being a property owner and a landlord?

“That depends on the building,” says Reiss. “For a brand new, fully rented, high-quality building in a prime neighborhood, a reliable, low-risk 4% to 10% return might be reasonable.

“But if you’re talking about a rundown building, in an borderline neighborhood, with a several vacant units that you’re planning to fill after you undertake major improvements, you might reasonably hold out for a 20% cap rate,” he explains, because you’ll have renovation costs on the expense side, perhaps a higher vacancy rate while you fix it up — and you’re taking a bigger risk with your money.

Using a Mortgage

Also, the cap rate assumes a cash purchase. When you take a mortgage to buy an investment property, lenders will likely demand a down payment of 25% or more, says Reiss.

So in that case, he suggests also calculating your return on upfront costs.

In our example, if you invest $300,000 in upfront costs (down payment plus other initial expenses like closing costs and renovations) and expect to earn $20,000 a year (after $50,000 annual mortgage payments), that’s just under a 7% annual return on your money.

Again, you need to consider the relative risk of the particular investment property to determine whether that payback rate is high enough. Look at several properties to get a better feel for how the risks and rewards compare.

Seniors Selling Their Homes

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hands-578917_1920

AARP Magazine quoted me in Selling Your Home. It reads, in part,

Judy and Joe Powell recently faced a decision most of us will eventually have to make: Should we sell our home and downsize to save money and effort, or hang on to the homestead because it’s familiar and full of fond memories?

After mulling the choice for a couple of years, the Texas couple decided to sell their 20-acre cattle ranch to move to a nearby college town.

“We are the sole caretakers of this property. It’s 24/7,” says Judy, 69, who mows the pastures with a John Deere tractor while her husband, 71, tends the cattle. “Basically, we don’t want to have to work this hard. We want time to play.”

The Powells now have their sights set on a single-story house in nearby College Station, where, for a monthly fee, someone else will maintain the yard. What’s more, they will be 30 minutes to an hour closer to their friends and doctors. The savings on gas alone will be more than a thousand dollars a year, Judy says.

Most of us aren’t dealing with the rigors of running a ranch. But, like the Powells, many of us will discover at some point that our homes, though we love them, no longer suit our lifestyles, or that they are becoming labor-intensive money pits.

A recent Merrill Lynch survey of people’s home choices in retirement found that a little more than half downsized and, like the Powells, were motivated by the reduction in monthly living costs and by shedding the burden of maintaining a larger home and property. Still, moving is not a decision easily made.

“The tie to one’s home is the hardest thing to understand from the outside. It’s a very personal decision,” says Rodney Harrell, a housing expert with the AARP Public Policy Institute.

Some people may be reluctant to move from a house where they raised children and created decades of memories, he says. On the other hand, the cul-de-sac that provided a safe place for kids may be isolating if driving becomes a challenge.

A good way to begin the process of figuring out what’s best for you is to “recognize the trade-offs,” Harrell says. First, consider the house itself. Is it suitable for your needs, and will it allow you to age in place? Most homes can be easily modified to address safety and access issues, but location is also critical.

“How close are health facilities?” asks Geoff Sanzenbacher, a research economist with the Center for Retirement Research at Boston College. “Are things nearby, or do you have to drive?”

Even if your current home meets these age-friendly criteria, you need to consider whether it is eating up money that could be spent in better ways to meet your changing needs.

For example, the financial cushion provided by not having a mortgage can be quickly erased by rising utility costs, property taxes and homeowner’s insurance. There is also the looming uncertainty of major repairs, which can cost thousands of dollars, such as a new roof and gutters, furnace or central air conditioner. A useful budgeting guide is to avoid spending more than 30 percent of your gross income on housing costs, says David Reiss, a professor at Brooklyn Law School who specializes in real estate finance.

“This isn’t a hard-and-fast rule, but it does give a sense of how much money you need for other necessities of life, such as food, clothing and medical care, as well as for the aspects of life that give it pleasure and meaning — entertainment, travel and hobbies,” Reiss says.

So if your housing expenses are higher than a third of your income or you’re pouring your retirement income into your house with little money left to enjoy life, consider selling and moving to a smaller, less costly place.

Just as important, once you’ve made the decision, don’t dawdle, Sanzenbacher says. The quicker you move, the faster you can invest the proceeds of the sale and start saving money on maintenance, insurance and taxes.

Take this example from BC’s Center for Retirement Research: A homeowner sells her $250,000 house and buys a smaller one for $150,000. Annual expenses, such as utilities, taxes and insurance, typically amount to 3.25 percent of a home’s value, so the move to the smaller home saves $3,250 a year right off the bat.

Moving and other associated costs would eat up an estimated $25,000 of profit from the sale, leaving $75,000 to be invested and tapped for income each year.

If all of this sounds good, your next decision is where to move. Your new location depends on any number of personal factors: climate; proximity to family and friends; preference for an urban, suburban or rural setting; tax rates; and access to medical care, among other considerations.

“You want to take an inventory of your desires and start to think, ‘Do I have the resources to make that happen?’ ” Reiss says.

Monday’s Adjudication Roundup

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