Financial planning is a process of addressing the financial challenges that life presents by developing a “personalized plan” to achieve your financial goals. Nowhere is this more evident than in real estate planning. More than any other wealth-building asset, real estate is joined at the hip with the life cycle.

Typically, young household purchase small, inexpensive homes; middle-aged household purchase larger, more expensive homes; while retirement households return to small, less expensive homes. There is no avoiding the impact of life’s needs and challenges on
property purchases.

Integrating the dynamic nature of real estate purchasing into the financial planning process is not difficult – just follow the life cycle. For simplicity, we can categorize the real estate cycle into four population groups: young households, thirty-something households, peak households, and retiree households. For each household type, we will list their needs, plans, and objectives with regard to purchasing and investing in real estate. Hopefully, this information will provide you with some extra insight into how to integrate real estate planning into your financial planning goals.

Young Households (20s to early 30s)

The first entrée into home buying occurs when children transition into adulthood and begin to accumulate some funds to purchase a home. Their incomes will likely grow in a healthy manner throughout this decade. Here are some of the dynamics of this household group:

Phase I Purchase a starter home
• Learn how to manage debt by cash and budget management
• Establish a satisfactory credit record
• Accumulate funds for down payment on a starter home
• Identify starter home with price appreciation potential
• Obtain low-down-payment / 30-year-mortgage financing

Phase II Accumulate equity/wealth for a trade-up home
• Establish 3- to 7-year goal to accumulate equity to purchase a trade-up property
• Set a target for accumulated total equity necessary to trade up
• As income growth permits, make extra mortgage payments to pay off more principal
• Refinance into a 15-year mortgage loan when economically viable (i.e., when mortgage rates drop and/or when income rises).
• Monitor the value of your home on an annual basis in order to calculate the amount of home equity accumulated (price gain plus principal paid).
• Try to limit equity borrowings during this stage of life. Use your income growth to fund major purchases.
• Prioritize retirement/college savings account by contributing to savings/retirement programs: 401K, IRA, pension, etc.

Thirty-Something Households (30s to early 40s)

If you fall into this age group, you need to get serious about your investment portfolio, including real estate. You must try to achieve your targeted equity goal so you can trade up to a more expensive home that will appreciate equity more quickly.

Phase I Purchase trade-up home
• Achieve equity target goal
• Identify trade-up home with price appreciate potential
• Obtain 30-year mortgage financing with down payment of 2- percent or greater
• Purchase trade-up home – use equity in first-time home

Phase II Save for second-property purchase
• Make extra payments when possible
• Refinance to 15-year loan when possible
• Continue to build a retirement/savings account – 401K, IRA, pension, etc. – for college and retirement
• Home equity is now part of your investment portfolio – integrate it in
• Utilize equity borrowing capacity by using borrowing for auto, college, home improvements, etc.
• Use accumulated equity to purchase a second property for investment/vacation

Peak Households (50s to 60s)

These are the best years of your life (no matter what the college generate says). You are in your peak earning years, making more money than you ever dreamed of. You  need to take advantage of this by expanding your investments into real estate. This is the time to build a real estate portfolio.

Phase I Build a real estate holdings portfolio
• Use accumulated equit7y to purchase third property for investment
• Buy real estate as a vacation home
• Buy real estate as a retirement home

Phase II Consider trade-down strategies
• If you are an empty nester, consider trade-down strategies
• Take advantage of capital gains exclusion and trade down to a less expensive home and use remaining funds for multiple real estate investments
• Set up a revocable living trust to protect properties from inheritance taxes

Retirement Households
As you wind down in life’s activities, you must also wind down your relatively high-risk investment portfolio by selling off a significant number of your real estate properties.

• Consider downsizing to a smaller/less expensive home if you haven’t already done so during your peak years.
• Use remaining funds to purchase more liquid investment vehicles rather than real estate
• Begin selling your real estate properties as you transition your portfolio to a more liquid and less risky bond/mutual fund-dominated portfolio
• Hold on to a select number of properties that could be inherited by your heirs
• Consider reverse mortgages if you need a cash flow for retirement