Tag Archives: financial advisor

Tapping Home Equity for Retirement Income

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Newsday quoted me in Consider Tapping Your Home Equity for Retirement Income (behind paywall). It opens,

Just as Dorothy in the “Wizard of Oz” had her ruby slippers that could have gotten her back to Kansas at any time with three clicks of her heels, retirees have the option of tapping their home sweet home to bridge income shortfalls.

Yet, according to research from the National Council on Aging, only 20 percent of retirees polled said they would be willing to use their home equity to generate income. Information was obtained through focus groups with 112 people aged 60 to 75, and two surveys of 254 financial advisers and 1,002 older homeowners.

When you’re in a pinch, here’s how to get the max out of your home.

– Get over the notion a home is sacred: “Using your home equity to generate retirement income can help you delay claiming Social Security,” says Gary Borowiec, a financial adviser and managing partner at Atlas Advisory Group in Cranford, New Jersey.

– Audit your housing situation: Determine if you’re using your home equity wisely. “Is a senior citizen living in the same home where she raised her children who have now gone off to live on their own? Would it make sense to downsize to an apartment with lower costs and fewer maintenance issues? If so, redirect some of the equity from the original home to investments that can generate an income stream over the course of her retirement,” says David Reiss, a professor at Brooklyn Law School specializing in real estate.

Grading Trump’s Economic Performance

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TheStreet.com quoted me in President Trump Grades Out Well in the Eyes of Financial Advisors. I was a contrarian voice in this story:

President Trump has been in the office for a little over a month, and love him or hate him, financial industry specialists seem fairly bullish on his performance from an economic point of view.

That’s the takeaway from a single question posted to a handful of highly-respected U.S. financial advisors – “how would you grade President Trump’s economic performance one month into his term?”

All the advisors contacted by TheStreet stated, in unison, that it’s very early in the Trump presidency, and that events can change on a dime when it comes to key consumer financial issues like jobs, the stock market, gross domestic product, the housing market, and consumer spending.

But the reaction from virtually all the money managers in touch with TheStreet.com was positive, with a healthy share of As graded out. Here are those grades, and why wealth managers are, for now at least, putting. Trump at the head of the class:

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David Reiss, Professor of Law, Brooklyn Law School, Brooklyn, N.Y. – “I give President Trump a first term grade of C- for the housing market. He has indicated that he wants to roll back Dodd-Frank and the Consumer Financial Protection Bureau that it created. That will have a negative impact on homeowners who are protected by Dodd-Frank’s Qualified Mortgage and Ability-to-Repay rules. Trump started the process of rolling back Dodd-Frank with a vague executive order directing Treasury to review financial regulations. If Trump decides to completely gut the homeowner protections contained in Dodd-Frank, his grade will plummet further as predatory lending rears its head once again in the housing market.”

With media mavens, political activists, and even Main Street Americans squaring off over one of the most controversial Presidents in history, the outlook from financial specialists — with the exception of Reiss — on the economy is a bullish one, even if it’s only a month or so into the Trump administration.

Multifamilies for Retirement Income

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photo by Laurent Montaron

Financial Advisor quoted me in More Retirees Turning To Multifamily Homes For Income. It opens,

Many clients are investing in multifamily residences as a way to generate retirement income.

“A common way for people nearing retirement is to buy a triplex or fourplex, live in one unit and rent out the others,” said Keith Baker, a financial advisor and professor of mortgage banking at North Lake College in Irving, Texas. “They sell their home and use the equity they have built up to do this, and if they still owe some debt, it will be paid down more quickly.” Among the best multifamily properties to acquire for supplemental income is one that has separate entrances with no shared common areas so that each family has their own space, according to Michael Foguth, a financial advisor in Brighton, Michigan.

“Townhomes are very popular,” Foguth told Financial Advisor. “Also popular are duplexes where you have one unit on the ground level and one unit on the second level.”

But clients should not spend so much money to acquire a property that their retirement income ends up undiversified. “If the bulk of your retirement income is tied up in one property, you are exposed to natural disasters like floods as well as economic downturns in that market,” said David Reiss, a professor at Brooklyn Law School who teaches real estate finance.

An alternative to buying a property is modifying an existing residence with the intent of renting out rooms on websites like AirBnB or HomeAway. “You would need to make sure that deed restrictions, zoning and city ordinances allow this,” Baker said. “It also will require property insurance and additional liability coverage.”

When a multifamily rental property is also a primary residence, a portion of the mortgage is tax deductible, according to Carla Dearing, CEO of SUM180, an online financial planning service. There may also be the opportunity to leverage tax benefits like depreciation.

“Selling your home and taking out a loan on a rental four-unit apartment complex allows you to deduct from your income the pro-rated interest expense along with the depreciation expense of the portion of the units you don’t live in so that much of the income is sheltered,” Baker said.

Over time, the income support received from a rental property can be greater than the interest income from investing in the stock market. “You’re likely to receive a nice stream of income when you are renting to people with guaranteed incomes,” said James Brewer, CFP, in Chicago. Nationally, the average price-to-rent ratio is 11.5, meaning that the average property owner is buying a property for a price of 11.5 years worth of rent, which is an estimated 8.7 percent yield on her investment, according to data from Zillow.

A house that cost $200,000 should bring in $1,450 per month in rent using the national price-to-rent average, according to Matt Hylland, an investment advisor with Hylland Capital Management in Virginia Beach. That’s compared to 10-year government bonds, which yield 1.7 percent and the S&P 500 index, which yields about 2 percent.

“But this 8.7 percent is before any costs,” Hylland noted. In other words, clients who add rental property to their portfolios should also add cash to their emergency funds so that have money on hand to maintain and repair the house. “If the roof needs replacing, do you have $5,000 available to fix it?” asks Hylland.

Ideally, a multifamily acquisition will be move-in ready. “Homes that require construction or renovation can easily turn into a money pit, costing twice what you estimate up front,” Dearing said.

Borrowing from Yourself

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MainStreet.com quoted me in Dipping Into Your 401(k) to Finance the Purchase of a Home is a Tricky Decision. It reads, in part,

Dipping into the funds she had amassed in her 401(k) account to make up the remaining difference for her down payment was not a decision that Alyson O’Mahoney embarked on lightly.

After contemplating the benefits and disadvantages of borrowing $40,000 from her retirement account to use for a down payment on her mortgage, the marketing executive for Robin Leedy & Associates in Mount Kisco, N.Y. was certain that she making the right choice.

O’Mahoney was undaunted by the prospect of having another bill each month, even though she opted out of discussing this critical decision with her financial advisor — as she knew he would discourage her.

“It all fit into my debt and income ratio and the bank was fine with it,” she said. “I pay it back automatically with each paycheck and the 5% interest goes to me. It was the easiest process.”

Many financial advisors steer their clients away from borrowing from their retirement, because employers will typically demand that you repay the loan within a short period if you leave your job or get fired. If you can’t pay it back from your savings, then the loan will be treated as a distribution that is subject to federal and state income tax, as well as an early withdrawal penalty of 10% if you’re under the age of 59.5, said Shomari Hearn, a certified financial planner and vice president at Palisades Hudson Financial Group in the Fort Lauderdale, Fla. office.

“If you’re contemplating leaving your company within the next few years or are concerned about job security, I would advise against taking out a loan from your 401(k),” he said.

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If you accept another job offer, refinancing your mortgage may be difficult when you are facing a time crunch, said David Reiss, a law professor at Brooklyn Law School.

“If you leave your job, the loan will come due, and you will have to figure out how to repay it – potentially just at the time it would be hardest to do so,” he said. “Given that it might be hard to refinance the property on such short notice, you might find yourself stuck between a rock and a hard place.”