In the world of financial planning, nest eggs are assets or accounts that are usually set aside for the purpose of retirement. Nest eggs are not necessarily cash accounts; they can be securities, debt instruments, precious metals, annuities, or retirement funds like IRAs or 401(k) accounts. In the days before the collapse of the American housing market a few days ago, many people looked at investment properties and even their primary residences as their nest eggs.
Now that the green shoots of the housing economy of the United States are pointing to an eventual recovery, the idea of real estate as a nest egg is once again taking hold. The conditions are certainly present; mortgage interest rates are at record lows, and home prices in several regional housing markets seem to have reached a bottom. Real estate investors have additional incentives to purchase properties thanks to foreclosures and short sales that present great bargains.
The climate for real estate investing has definitely improved, but that does not mean that everyone should become an overnight investor by blindly tapping into nest eggs. There are several factors to consider.
Primary Residences v. Investment Properties
In the absence of a housing market crash, real estate tends to appreciate at a steady annual rate that often rivals the major financial indexes and other investments. The problem that some would-be real estate investors face is that they turn their primary residences into investment properties. Primary residences can generate wealth, but their main function is to provide shelter.
Investment properties, on the other hand, can serve as sources of rental income, second homes, or even as emergency housing. Nest egg dollars can be used to purchase and maintain an investment property, but when they are used for primary home repair and improvement, they should eventually be replaced. Placing all the eggs in one basket is another mistake, and to this end not all nest egg funds should be put into an investment property at once. The key is to build a diverse portfolio, not to make a second home the sole retirement asset.
Long-Term Capital Growth
In various metropolitan areas of the United States where rental properties are heating up, real estate investors are snapping up properties for two main purposes; one is to put them into lease contracts as soon as possible, and the other one is to immediately turn around and sell them as profits to other like-minded investors. The latter purpose is a short-term strategy with an exit plan that aims to take advantage of market conditions to make some quick cash.
When nest eggs are used to purchase investment properties, they should not be used for speculative purposes. Seasoned real estate investors who jump into active markets do not normally tap into their nest eggs for quick transactions. Nest egg investments should be utilized for long-term growth investments, and not for risky endeavors such as flipping real estate.
Homeowner loans and secured loans can be a better option for risky endeavors. A homeowner loan can be tailored to your exact needs, making it a valuable asset for your endeavor.
Debts, Maintenance and Taxation
Acquiring an investment property as part of long-term nest egg building strategy comes with certain caveats, including maintenance costs, a debt burden if a mortgage involved, and the fact that investment properties are not usually exempt from taxes. To this end, potential investors should consult with accountants and financial planners regarding their options before taking money out of tax-deferred accounts.