Buy your retirement home before you retire

Last updated on February 22nd, 2022 at 05:13 am

You may want to buy your retirement home before you retire. Call it a second home or vacation home until you make the move from your current home. There are some great reasons to do this if you can afford to buy your retirement home in advance of retirement. This blog goes into some of those reasons.

Why buy before you retire?  The best reason is that you will find it easier to obtain a mortgage on your second home while employed. Unemployed people even with great credit and assets often find it difficult to finance a home purchase. Your interest rate is likely to be better as an employed person as well. You are entitled to deduct income taxes and mortgage interest on a second home.

Consider renting your second home until you move or on a seasonal basis when it is not occupied. Renting your home will help to cover your costs.  There are tax benefits to renting the home as an income property beyond property tax and interest.

Mortgage companies offer as low as 10% down for second home

If you simply decide to purchase the home and use it a few times each year, you are solving some issues that can make your last few months on the job easier.  Buying a home can be a stressful task. You will either pay cash for the retirement home or obtain a mortgage.  Mortgage companies will permit another mortgage for a second home.

You can obtain a mortgage with as little as 10% down to buy a second/vacation home. The taxes are interest are deductible as well. Of course, all of this is based on your credit score and ratios.

As with many things that I write about, I followed my advice and know it works well. I had scheduled my last day at work and we moved a couple of days later. My house in California was not sold when we left. No problem we had our “second” home to move into. We were not stressed about dealing with selling the house. My agent took care of it, mowed the grass, etc. No stress.

We decided to keep it for our use

We decided not to rent our retirement home but we did visit it fairly often.  During the two years that we owned it (before we moved permanently), we were able to accomplish much with window coverings, flooring, yard, dock, and more.  Before I left my employer all of our improvements were paid for.  Working in the retirement house was enjoyable during our two-week stays.

As it happens, the cost of homes has increased as have mortgage rates.  We are ahead on both counts.  Yes, we were making a mortgage payment on the vacation home but a large portion of that was payment on principal due to the low mortgage rate.  Rates are still very low compared to a few years ago so it is still possible to save money on your mortgage rate compared to waiting a few years to retire.

As I mentioned, the value of our home has gone up.  When I consider the interest paid for the two years and compare it to the gain in value and the principal paydown, I am way ahead.  We were also able to get ahead on things such as vehicle and boat registration all of which were at a lower cost than our previous state.

People are leaving high cost states

A large number of people are leaving high-cost states for low-cost states or areas of states with low-cost communities.  The longer you wait to make a purchase, the fewer opportunities will exist in the area you decide to move to.  No need to retire early if you can swing a second mortgage.

Another thing to think about is sharing residency.  State taxes in Mississippi are among the lowest on earned income.  There are no state taxes on the retirement income of any kind after you make the final move.  If you are in a high tax state such as California and pay upwards of 13% in state taxes, you could live in for example the Gulf Coast of Mississippi for six months and a day at various times and split taxes with both states.

Plan ahead you can save thousands of dollars in taxes

Plan if you intend to move to Mississippi from California as an example. If you are going to take a taxable distribution from your employer or retirement account, take it after you have established legal residency in Mississippi. You will save lots of money as Mississippi does not tax retirement income even 401k and IRA’s.

Consult your CPA about your potential move and tax benefits and issues with sharing residency between two states.

Yet another choice is to send your adult children to college in the area you are moving to and allow them to live in your retirement home.  You can visit them from time to time.  There may be some tax benefits here as well.  At least you can get them to mow the grass.

Buy a retirement home first to lock in your investment

You could also purchase a retirement home as a method of locking in an investment in the area of your choice for example the Mississippi Gulf Coast.  You can move to it upon retirement or decide to sell it and buy something else.  At that point, you will have been invested in the local market, your appreciation can be leveraged into another home that you will live in or you can keep it as a rental property.

If you need a down payment and have a 401k plan, you can borrow up to $50,000 without penalty for a home.  You will have to make a repayment every month that includes interest that you pay to yourself.  Your house may appreciate on par with some of the lower-yielding investments in your portfolio.  It’s a way to diversify your portfolio.

You can also shift retirement funds to a self-directed IRA where the IRA can purchase the second home if you intend to rent it sometimes. There is no tax event for this strategy. The difference is that with a self-directed IRA buying the home, all of the income after expenses goes back to the IRA until you make a taxable withdrawal. You can withdraw your IRA funds in a year when your income is expected to be lower. Again speak with your CPA about this.

More on retirement and investment strategies

Please read other articles on this blog about retirement and investment strategies and living on the Mississippi Gulf Coast. You may want to read our most popular article “Why I decided to retire in Ocean Springs, Mississippi”. Read this article as well, it is also popular “Why you need to retire on the Mississippi Gulf Coast”.

If you are interested in turning your property into a vacation rental, contact Christies Gulf Beach Rentals. Click to visit their website and see the vacation rentals they are offering. If you are going to visit the area to look at properties, you may want to stay at one. Christies can help you set up your second home as a vacation rental.

Please contact us if you have any questions because we have suggestions particularly as we may interest you to purchase a home on the Mississippi Gulf Coast.