Insider Jeff Fleming

Relying on Real Estate?

Jeff Fleming discusses some of the ins and outs of real estate investing. Also, find out the penalties for withdrawing from your IRA too late.

Dear Jeff:
I am considering buying a home; I currently own a townhouse that I refinanced for 15 years in 1995. The payments are low ($500/month), while the new home's payments will be around $750. I plan to retire in two years, and figure this is my last chance to get a mortgage. I have considered renting the townhouse and using the cash for a down payment. Two questions: do you think it is a good idea to get a 30-year mortgage at this time, and what do you think of the renting idea?

Jeff Says:
Mortgage interest rates are still very low and, I think most would agree, have nowhere to go but up. So, if you are thinking about a long-term mortgage, now is still a good time to apply. The advantage of a 30-year, fixed-rate mortgage is that you can be sure to lock in the interest rate for the entire duration of the mortgage, which means that your monthly payment will not change. If you believe as I do that interest rates will go up, then you will certainly benefit by the fixed rate mortgage in comparison to those who have variable rate mortgages.

You also might consider reducing the length of the new mortgage. Obviously, this would increase your monthly payments, but it also would substantially reduce the interest charges. In addition, financial institutions often reduce the interest rate charged for a shorter duration mortgage, which would save you even more money. And when your payments end, you would have extra income to supplement your retirement income.

As far as renting your townhouse is concerned, confirm that your proposed rental income will exceed your monthly obligations associated with the property. Be sure to include insurance and property taxes in your calculations. If the numbers work to your favor, then your plan may be a good one.

To make an informed decision, you must also be aware of the risks associated with real estate investing. As with most investments, you face a risk of capital loss. Real estate prices may go down, as they did approximately a decade ago. Many fortunes were lost. So, the greatest disadvantage is the illiquidity factor. You may not be able to sell the property for its true market price as quickly as you would like or as quickly as you may need the money.

The final consideration is whether or not you want to be a landlord. This may not seem like such a big deal, but if you are unhappy with managing the property, the money may not be worth it.

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