Build Your Retirement Home Before You Retire

Last February, Ken Means bought a 3,000-square-foot home built in the early 1990s on 80 acres of land. Located in the Ozarks near Cabool, Mo., it is six hours from Means's home near Peoria, Ill., so he can't go every weekend. But when he can spare a day or two, he works on projects such as building a pond to attract waterfowl. The property is ideal for Means not only because he is an avid hunter but also because all that land comes with a reasonably new house—as opposed to a wreck in need of restoration. Plus, shopping and other basic services are no more than 15 minutes away.

Means, who is 56 and owns a fire-equipment business, says that five years ago he started toying with the idea of buying a vacation home that he could eventually retire to. Now he says he may sell his business in as little as two years—so he can resettle sooner to his spread. Land is cheap in the Ozarks, so his new property set him back less than $300,000, house included. Property taxes of less than $1,000 a year are also low.

The Missouri Ozarks is a low-income area, so there aren't many locals with the cash to bid up property values. Dollars aside, Means says the smartest thing he did before buying his house was to take the time to look at many properties and talk to residents and real estate agents. He knows he'll be comfortable living there permanently when the time comes.

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"You'll want to buy something early enough to get it into shape before you do retire," says Means. "You don't want to retire and then work your butt off, because that defeats the point." The remote property is unlikely to attract renters, so he's not even thinking about a listing. Instead, he has opened the door to his family. His parents recently stayed for two weeks, and his sister and her family will vacation there for a week and a half.

A permanent vacation home

When you're ready to retire, there's surely a manicured, gated subdivision with stair-free designs and an unchallenging golf course in your area. And the easiest (and perhaps least costly) decision is to stay in place and carry on, sans the commute (see The Benefits of Aging in Place). Some more adventurous retirees choose to move to a Sunbelt mecca or even to live overseas (see How to Retire Abroad).

But there's another way: Buy or build a retirement home before you retire. You can enjoy it now for recreation and relaxation, years before you get the gold watch. You can use it as a weekend and holiday retreat, and you can expand or adapt it gradually so it can function as a permanent residence. The home doesn't have to accommodate every luxury you'd ever want. The location and the lay of the land are the draw.

According to the National Association of Realtors, U.S. vacation-home sales were a relatively modest 469,000 in 2010, rose to 502,000 in 2011, grew to 553,000 last year and will rise again in 2013. Prices are still depressed from the peaks of 2005 and 2006, the two years when Americans bought more than a million second homes. Still, prices rose 24% last year, to a median of $150,000 for existing properties.

With real estate prices booming again, could desirable recreational and resort-area property sell so fast that if you wait even one year to buy, you'll strike out? Stacy Matherly, the real estate agent who sold Means his acreage, says she is inundated with e-mail inquiries from distant "sofa surfers" who are eager to go home-and-land shopping. David Knudsen, a real estate agent in Liberty, N.Y., says the second-home market generally trails the primary market by six to 12 months. It is definitely on the rebound, if still in the early stages.

Half of all second-home buyers pay cash. But that stat may be misleading because the transaction counts as a cash sale if the buyers draw on a home-equity line on their main residence to pay for abode number two. If you need a mortgage, note that the standards for vacation homes are tougher than for the purchase of a primary home. You will need excellent credit and a down payment of at least 20%. Plan on paying an interest rate on the mortgage that's a little higher than for a first home.

Brokers who sell property within 150 miles of New York City say that affordable real estate still exists in the region, and buyers are tapping stock market profits rather than taking out bank loans to pay for it. For example, in Sullivan County, in the Catskills two to three hours northwest of Manhattan, there are listings for three-bedroom houses on five acres ranging from $200,000 to $300,000. These houses are rustic enough that you would probably want to invest in some upgrades. Direct water access, whether to a lake or river, and sweeping views pad the price substantially.

Build it?

Not all preretirees are interested in an existing house, however, especially a dated ranch or bungalow. If you want to build, David Weiner, a New York City architect known for his glass-walled weekend retreats in the Catskills and the Berkshires, says the first and hardest job is finding the land. It can take as long as two years to get local permits. You can also expect to deal with environmental quirks; water and septic conditions are all over the map in rocky places such as Maine and other mountainous regions. In remote southern Colorado, where Weiner has also designed custom homes, people will pay a premium for building sites where there will be 320 sunny days a year to power their off-the-grid solar units.

In the East and Midwest, you'll pay a premium for proximity to skiing and hiking trails, good roads, and beautiful vistas. Land becomes less expensive about a three-hour drive from a major city. The farther you go, the more land you can get for less.

Some architects will design second homes as small as 1,500 square feet. Weiner says most of his clients prefer a smaller weekend place anyway, because the cost of construction keeps creeping up—especially in rural areas, where the climate can require that the construction withstand storms, floods and wind. The total cost to build can easily reach $250 per square foot; combined with the cost of the land and the architect's plans, you could be looking at $750,000 for even a pocket-size luxury home in a high-cost region such as New England.

Weiner says you should budget for a 10% to 15% overrun in building costs because something will go wrong, whether it's a drainage problem or new regulations that magnify the cost of installing utilities. Fortunately, once you've acquired land, no one can outbid you. If you decide not to go ahead with the project, you should be able to sell the tract for a profit.

If you're not ready to cash in your current house, or if you don't want to or cannot borrow enough against your equity to swing the deal, you may have to negotiate a construction loan with a bank. You can eventually roll the balance into a 15-year mortgage or even pay it off if you profit enough from the sale of your primary residence.

Rent it for income?

To defray the costs of maintaining two homes, you may be able to rent your lair to short-term visitors (see Tax Breaks for Second-Home Owners). Insiders say the rental business is booming in most places, citing a high volume of bookings and rising rents at HomeAway, Vacation Rentals by Owner, Airbnb and other agencies.

In a survey by the NAR last year, more than 90% of vacation-home buyers said they planned to rent their new property within one year, and three-fourths of them expected rents to cover at least half of their mortgage. That's more realistic now than it was during the recession, but you're taking a chance if you expect your vacation home to function as an ATM to make the cash-flow numbers work. It's better to buy or build something you can afford from current resources and shop diligently for the right property and price—even if your heart is telling you to rush to closing right after a memorable vacation.