Unlocking the Equity in your Home for Retirement:

Let me start by saying I am not a tax expert, an exchange expert, or a financial adviser.  Please check with the appropriate adviser before acting on my thoughts below.

I received a call last week from someone in search of a HELOC.  They had been referred over to me by a financial adviser that knows me well.  Now I do not provide home equity lines of credit, but I wanted to point this person in the right direction.  And my wish to provide value added only took about 30 minutes!  Oh well…

She had been to two banks that would only approve her for about a $100,000 HELOC.  She actually wanted about $300,000.  After listening to her, I told her that most financial institutions would look at her and her husband similarly.  However, I then started scratching through the surface to find out a few things that explained her motivation.  Her husband was getting ready to retire; and they wanted to buy enough time so that they could wait until he was 70 years old to start drawing on social security.

In addition, the financial adviser had given them a strategy to move out of their home and rent it out for two years.  Then they could do a 1031 exchange.  All good advice, but she seemed to get some of the details confused.  The good part is that they really did have a lot of great options.  Their home could be rented out for as much as $48,000 a year (more or less).  Now once they did the exchange, they could then exchange into a much better cash flowing property.  Since they would have about $2,000,000 to exchange, I explained that some clients move the money into other areas of the country and earn about 7% on the money.

She had a hard time believing that (stating it was too good to be true).  I laughed and told her I had nothing to gain by suggesting that it was a possibility.  I told her to research Single Tenant Net Leased properties in states like Illinois.  I gave her a few examples of companies in these types of buildings.  I also told her that she would more than likely be trading appreciation for cash flow.  I also wanted her to reconnect with her financial adviser.  However, making about $140,000 a year with some depreciation write-offs certainly would provide a nice increase and allow them to relax and enjoy retirement.

For any clients nearing retirement, a strategy like this can work to increase cash flow significantly.  All decisions have risk associated with them.  It is the job of all the advisers to present the choices and help the clients make informed decisions.  The good thing is that Bay Area long-time homeowners have many choices that may be overlooked.  This is but one of the choices.  My suggestion for those trying to guide your clients is to get informed, build a team for helping clients, and then meet with the team and the clients to match solutions to the client’s objectives.

That is it for this week.  As always, feel free to call with any of your strategic financing questions.

Articles of Interest:

Forbes reported “The Fed’s Balance Sheet Reduction Could Be A Lot More Dangerous Than People Think.”

NREI reported “Two CRE Investing Rules You Can’t Ignore.”

Forbes also reported “Should You Invest In Rental Real Estate?” The author has given some solid advice for investing in residential properties.  The lending rules there are much different than investing and obtaining a loan for commercial or apartment properties. When looking to invest in investment real estate, one should look at the pros and cons for both residential and commercial property investments.  For example, with a Net Leased Single Tenant property, many management headaches can be avoided; and the loans are based more on the net operating income.  However, one still needs to do their due diligence and have the necessary down payment (typically near 35%).