Chances are that several of your retirement-age clients are considering some significant home remodeling work in the near future. When they do, they are likely to consult with you about finding the money to pay for it.
But rather than just issuing a check at the clients’ request, offer to first have an in-depth discussion about the project. You could end up saving them time, money and aggravation, and earn their appreciation for your interest and expertise.
Why home improvement, and why now?
Several factors make it an optimal time for retired clients to begin working on improving and updating their homes. First, without the constraints of employment and raising a family, retired clients now have more time and energy to devote to planning and monitoring the work. They also may be interested in modifying their current home so that it will be easier to “age in place” (for example, adding a master bedroom and bath to the main floor).
Low interest rates, more generous appraisals and friendlier lenders have made it more expensive for the clients to just buy a new, updated home. But those same factors make it easier for the homeowners to borrow against home equity to fund improvements to their current place. If the clients would prefer to pay cash instead of borrowing, it could be argued that the assets they would sell to fund the project are closer to the “highs” than the “lows”.
Clients can also take advantage of improved technology and available materials to make their current homes more energy-efficient, providing a future payback in lower utility bills and less electricity, oil or gas used.
Even if the clients are planning on moving in a few years and are hesitant to invest a significant amount of money in their current home right now, you should point out that some neutral improvements today could mean a quicker and more lucrative sale down the road. A study by Remodeling magazine found that attic insulation, new entry and garage doors and window replacements provided the highest rate of return-on-investment when the improved homes were eventually sold, with gains ranging from 82 percent to 116 percent of the project’s cost. And while the homeowners remain in the home, they will experience the intangible enjoyment of the improvements almost every day.
Finding the right people
One of the biggest hurdles faced by would-be remodelers is finding the right person for the job. If you live in the same area as the client, perhaps you can suggest a contractor, carpenter or other skilled specialist who has worked well for you in the past. You probably know some appraisers, real estate agents and lenders who may be able to suggest a few candidates.
You can also check with other clients who have recently completed their own remodeling projects and see if they would (or wouldn’t) recommend the particular professionals who did the job. The National Association of Homebuilders (www.nahb.org) also has a searchable database of thousands of home remodeling professionals, many of whom have an expertise in making aging-in-place modifications.
How much is too much?
Even the most eager home improvers may balk at spending five or six figures on a remodeling project, especially if they are still suffering from the anxiety that naturally occurs when regular paychecks aren’t coming in any more. So, run an updated financial projection of how the rest of their years might play out after pulling a chunk of capital out to pay for the improvements. Or, if they are getting a loan, add in the new monthly payments to their monthly expenses. You could also point out that the longer the clients live, the more likely it is that the work will have to be done, and it’s usually better to do it sooner rather than later.
Paying the bill
Finally, the most important question you and your clients will have: “Where is the money going to come from?”
Clients who have more liquid cash than they do an appetite for debt should tap checking and savings accounts, as long as there will still be plenty of money left over for future emergencies and expenses. Investments can be liquidated as well, keeping an eye towards any potential capital gains tax liability on the sales. Also, make sure that the resulting asset allocation is still appropriate for the client.
Taking big withdrawals from tax-sheltered retirement accounts (and annuities) should be avoided if possible, as the distributions will be added to the clients’ taxable income, and could artificially boost them up into a higher tax bracket.
Debt may be better
If any of the aforementioned conditions reduce the viability of paying cash for the improvements, it might be time for the clients to visit the lending department of their bank or credit union. A home equity loan is ideal if the clients already know roughly how much the remodeling will cost. The loan typically has a fixed interest rate and term but can often be repaid early with little or no penalty.
If the cost and timing of the project are still uncertain, a home equity line of credit (HELOC) may be more appropriate. Once established, the homeowner can borrow up to the lender’s limit at any time, but at first only has to pay interest on the borrowed amount. The interest rate is usually tied to a benchmark and can fluctuate. After a period of usually several years, the lender often proposes that the borrowed amount be repaid or converted to a traditional fixed-rate loan.
If clients want a low fixed-interest rate, with a long time to pay off the debt, they may want to consider getting a traditional fixed-rate primary mortgage. They can use the proceeds to not only pay for the home remodeling, but also pay off other higher-rate loans and cover future larger expenses.
Once your clients have completed their projects, try to schedule your next meeting at their home so that they can give you a tour of the improvements. You will get their gratitude for your help, without having to do any of the actual work.
Kevin McKinley is principal/owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of Make Your Kid a Millionaire (Simon & Schuster).
