Smart Buying
Cash in on Your Home?
Frothy housing prices produce joy about our profits ... and fear over how to protect them.
By Kristin W. Davis
From Kiplinger's Personal Finance magazine, April 2005
Many 21st-century homeowners are feeling as if they've won the real estate lottery. Especially on the East and West coasts, they have seen their home values double, or even triple, over the past five years. There's just one problem: It's all on paper. You can't reap the benefit of all that wild appreciation, or protect it from a blowup in your local housing market, unless you somehow cash out.
A small but growing number of homeowners are doing just that. Karen Davidson Seward took advantage of New York City's soaring real estate market to make a move last year to her "dream retreat," a house and barn on nine acres in Lake Placid, N.Y. She paid $250,000 in 1987 to buy a loft in a Tribeca warehouse that had been used to refrigerate cheese. In 2004, after many improvements, it was worth $1.6 million.
The Lake Placid property was a fixer-upper, too, purchased for $65,000. Karen says she has spent another $185,000 to turn the open barn into a winterized living space, complete with plumbing. (Along with her husband, Peter Seward, she did the woodworking herself -- a talent she's proud to say she learned from her father.)
"I had spent nearly 20 years paying off the debts associated with getting the loft -- I didn't save any money," she says. "It became very clear to me after 9/11 that all my eggs were in one basket, and suddenly that investment did not feel secure." Living seven blocks from Ground Zero, Karen had grown weary of the heavy security in her neighborhood. She also felt that there would be no better time than the sizzling market of 2004 to take her profits.
Taxes and real estate commissions took a healthy bite from the proceeds. But for the first time, 50-year-old Karen has a retirement account, invested mostly in stocks and bonds. She's put some of her profits aside to invest in more real estate.
Karen, a graphic designer, primarily works from her Lake Placid home (as does Peter, an illustrator), although she makes occasional trips to New York City to meet with clients. "That's a wonderful balance to being in the wilderness," she says.
For Karen and Peter, who were psychologically ready to pull up stakes, the madcap run-up in housing prices was a golden opportunity to act on an idea that had been simmering for years. And if you live in New York, Southern California or one of the other hyper-inflated housing markets that trigger nightmares of bursting bubbles, bailing out soon could prove to be a shrewd financial move, too.
We know that for every homeowner who fantasizes about semi-retiring on real estate profits and living the simple life in a bucolic locale, few are truly willing to leave behind friends, extended families, schools and communities. But there's no denying that many harbor fears and worry over how can they protect the home equity that makes up a large part of their wealth.
There's no perfect solution. Empty-nesters can cash out and downsize--and tuck their profits someplace safe -- but they may run into tax snags. Risk-takers can refinance to cash out profits and invest them in the stock market or more real estate. But if your house does fall in value, you could end up with more debt than the place is worth--and investment losses to boot. "I'd think twice before I had someone dump their home simply for financial reasons," says Gary Schatsky, an Albany, N.Y., financial planner.
The sky is falling?
Every client who comes into my office asks about buying a condo on spec -- every one," says Benjamin Tobias, a Plantation, Fla., financial planner. "It's reminiscent of the stock-market bubble in 1999, when every client came in wanting tech stocks." The indicators of a market top are easy to find, from "get-rich-quick in real estate" seminars filling church basements and hotel conference rooms to a soon-to-debut reality-TV series called Property Ladder. The show will start out chronicling the efforts of Southern Californians to buy, remodel and flip properties for profit. But for the record, we don't think the national housing market is headed for a crash. A breather, yes, but not a crash.