How Will I Pay the Mortgage When I Retire?

Approaching retirement is an exciting time when we can look forward to an easier-going lifestyle, less stress, and more time to do the things you love. After all the years of hard work, you deserve to reap the benefits of your studious work ethic and determination to succeed.

Of course, it’s not all party. Giving up a long-term career and making a life transition creates concerns for all of us.

Those that have considerable passive income or that continue to plan on working, might not be as concerned, but even for the well-prepared, retirement brings financial challenges.

If we’ve been entrepreneurs, often our portfolio of businesses and rental properties is our retirement fund. After years of holding and letting tenants pay down the mortgage, the build-up of equity can be enough to fund a fulfilling retirement or start a new venture and spontaneously pursue unforeseen opportunities for adventure.

What’s your goal?

What is your goal in retirement? Do you just want to quit working and struggle to pay the mortgage? Or, do you want to make a change and explore skills and achievements in an entirely new endeavor?

If it’s the latter, you’re going to need funds for your dream (most cases…). Even if you’re not worried about not being able to pay the mortgage or service the debt on your rental properties, you’re not going to want to continue paying for maintenance, annual property taxes, insurance, and management on high-society properties that demand constant attention.

You’re going to want to save that money for helicopter sight-seeing tours over Hawaii, cruises across the Caribbean, Times Square taxi rides, and whatever else you imagine in your retirement-travel wishlist.

Considering Financing Options

Currently in the process of buying a home or rental, or refinancing? If so, watch out for adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs).

The disadvantage of both these loan types, while they offer the opportunity to pull out equity in the form of cash and the potential for low or no initial payments, is that after a predetermined amount of time, ARMs will adjust the rate and payment to match a predetermined market indices such as the one-year LIBOR. During periods of decreasing interest rate, this can be very favorable; however, when rates are steadily rising, such as now, adjustable rate loan instruments pose a significant threat to your future cashflow. HELOCs pose the potential to hit the borrower with payments that can double when the initial ‘draw’ period ends and the ‘repayment’ phase begins.

Whenever committing to new financing on real property, particularly with rates approaching 5%, seek loans that feature a fixed-rate and no balloon payment. Adjustable rates and cashflow don’t support each other well in fast-growth markets with rapidly increasing interest rates.

Building Your Cash Reserves

To pay the mortgage on-time every month without strain, deal with capital expenditures (major repairs), changing business structures, and potentially increasing payments and rates on your existing or future loan, be sure to retain 10-20% of your net operating income (NOI) as a contingency fund. This will also help if you experience personal cash flow issues entering retirement. Maintaining your property consistently over the long-term will also improve its value, appeal, and demand from tenants, contributing to strong cash flow for you personally and in your portfolio.

Generating Consistent Cashflow

In addition to having an ample cash reserve to deal with unexpected expenses and economic changes, it’s important to keep a strong positive cash flow from your rental properties if you’ll be losing a significant share of income from retiring from your long-term day job.

What if you could skip all the management and financial responsibilities associated with owning rental property, and pay less in capital gains taxes on the proceeds of the sale?

We have several viable options that can help you retain your passive investment income while only dealing with the management duties of holding and receiving payments on a well-performing note.

Pursuing New Opportunities & Freeing Up Your Time

If you’re done with the growth phase of your investment strategy, and it’s time to cash in your equity or convert your cash flow from rental income to debt income, they you may want to consider selling the property either for cash, under lease option, or with seller financing. You can structure your sale to provide tax-sheltering benefits, give you the cash you need now, and provide a consistent cash flow for years to come.

Call us at (617) 250-7100 or click here to learn more about ways to keep your cash flow golden through your golden years.