One of the most common questions I get from my FSO clients is “what are your thoughts on purchasing real estate?” It’s understandable given that a lot of FSO’s have significant excess cash flow. As a property owner and financial planner, I have a lot of personal experience with this and can offer some insights as to how I’ve seen this play out with clients. The following are some questions to ask yourself and considerations before you make a decision.
Do you value liquidity or certainty?
This is a question for you to reflect on for a while. Does the idea of knowing for certain where you will live, what your property-related expenses will be and where the nearest supermarket is located appeal to you? There are some people who really value certainty and knowing exactly which subdivision they will live their golden years out. However, that certainty comes with a cost. It is going to tie you to a specific location long-term which comes with pros and cons which are very personal to your life and financial situations. There are certain people who value liquidity and the flexibility it affords them. They can continue to invest in other avenues, but may not want to tie themselves to a specific location, monthly overhead or property. There is no right answer, except the right one for YOU.
Can you accurately anticipate your needs?
We are all dynamic beings. My life has played out dramatically different than what I thought 5 or 10 years ago (in the best possible way!). However, this means that the things I thought I would need to have done, or acquired by now have changed.
Do you think that you can accurately anticipate exactly where you’ll want to live, what the house should look like, whether you’ll want to have a house with a big yard or live in a condo? Do you actually know where you want to settle? You may have grown up in Texas and always planned on settling there upon retiring from the foreign service. However, you may not have spent much time there besides your home leave every few years. It’s entirely plausible that you won’t recognize your hometown once you return and will feel less connected to the local community. You may want to settle in another location altogether but have invested significant time/energy and financial resources to a property you don’t end up living in.
Not to mention that the house you imagine needing 30 years from now might not match up well with the house you purchase now. You will likely have a better idea of where you want to settle closer to retirement (think <10 years) at which point I think it’s reasonable to seriously consider purchasing a property.
Are you prepared to be a long-distance landlord?
Being a landlord can be challenging, not to mention when you consider the additional complications of living across the world with a 10 hour time difference. Are you comfortable with not meeting your prospective tenants in person? Are you comfortable delegating and paying for a property manager to handle the day-to-day administration of your property? Will your property generate enough cash flow to cover the typical 8-10% property management fees? If you want to forego a commercial property manager, do you have a network locally that can help you in a pinch? Who is going to supervise the repairs you make between tenants? These are all questions to answer before pulling the trigger.
Be clear on the property’s purchase
Real estate is a totally valid wealth-building tool, and can provide substantial stability and cash flow long-term. However, purchasing your primary residence requires a different set of decision-making questions than purchasing a pure investment property. Investors can get themselves into trouble when they blur the lines between the two. I am increasingly wary of the idea of purchasing your forever home and renting it out while you are posted abroad pre-retirement. After all, the home you want to live in forever may not be a home that is a good rental property.
Carefully consider taxation
Do you want to settle in a different state than your tax-residency state? If so, there could be significant tax implications of purchasing a property before you’re ready to actually live there. Some states will require you to pay state income taxes on your entire income even if you only receive rental income in that state. That can be an expensive decision!!
At the end of the day, none of these questions have a conventionally right or wrong answer. However, it takes a good amount of self-reflection to know whether property ownership will suit your lifestyle as well as your current and future needs. Please reach out if you would like to discuss whether purchasing real estate is right for you.