Downsizing your residence opens up lots of financial possibilities. It’s a smart alternative to consider. This is true for retired people of course but it’s also true for working stiffs like me.
If you are like most people I know, your home is likely your single greatest financial asset. That being the case, you have to be very deliberate about how you handle the wealth it stores for you.
The Benefits of Downsizing
If you downsize, especially into a smaller, newer home, your maintenance costs will be lower. Too many people stay in their homes too long. As their home ages, their repair costs creep up and rob them of funds they could otherwise use to grow their net worth or even spend and enjoy.
And if you are downsizing anyway and have the opportunity to move to a lower-cost, lower property tax location, so much the better. That just adds to the savings bonanza.
Keep in mind that if you are a married couple and have lived in your home for two out of the last five years, your first $500,000 gain is tax-free. If you are single, you can pull out $250,000 of profit without worrying about Uncle Sam taking a slice. That is more icing on the cake friends – and that pastry is sweet.
Another big plus is that you diversify your assets when you free up and redeploy the home equity. Actually, keeping lots of equity lying around in your home may be counterproductive if you really think about it.
While property values have increased over the last several years, there is no guarantee that home values in your neck of the woods will continue to rise. And even if they do, it’s very difficult to spend that appreciation. But if you pull that cash out of your property by downsizing and you invest the money, you could very well increase your monthly income as long as you invest in assets that generate income.
The Downside Of Downsizing
Of course everything has tradeoffs. If you do sell your home and downsize you’ll have to move. That’s a pain. You might have to say goodbye to familiar faces and friends and be forced to create new relationships which can also shake you out of your comfort zone. And obviously, if you downsize, your new place could be smaller. That’s not a negative for everyone but it could be for you.
Also, there is risk involved when you take this step. When you liberate that equity from your residence, you have to invest it. Since every investment has risks (including real estate), that means you have to take on the duties of investing this lump of cash and accept the ensuing risk that comes along with doing so.
Real estate has been a great way to build wealth for many people and for many years. But it’s not the only way to grow your net worth. Homeowners with equity in their property are surrounded by gold – but it’s trapped in their walls. It might be time to put on your miner’s hat and dig out some of that wealth and put it to better use.
I used to think that having a paid off home was the ultimate in financial freedom – until I paid off my home. Then I started realizing how much it really cost me to live in my big house. When my wife and I realized how much we spent on maintenance, repair, taxes and insurance, we started thinking about alternatives and their respective pros and cons too.
For me, a home is a place to live and sleep. My wife and I are still relatively young but our kids are mostly out of the house. We don’t need or want a big home. It’s just not that important anymore. And when we thought about alternative uses for the equity, it became a no-brainer to downsize and re-invest the excess equity elsewhere.
Are you considering downsizing? Why or why not?
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