Downsizing Your Home as You Retire

Many people don’t know when their last day of work truly is until it happens. Your job could be eliminated due to being acquired or technological advancements have replaced your duties. We all know the day will come when you choose to retire. The question is will you be prepared for it.

For the majority of people who retire, their period of stopping work represents a financial adjustment in their life. They are transitioning from working 40-50 hours a week and investing for wealth to living off social security and what their investments accumulated. Because most retired people’s homes are their largest investments, it’s only logical that their top priority is determining their living situation, and how it fits into their future plans.

If your retirement plan this year or next includes downsizing, the process of preparing should begin immediately. During the period of a pandemic or severe economic challenges nationwide it is even more crucial as one would expect the downsizing process to take longer than normal. The following are some tips to think about to make certain you’re getting the best possible benefits of downsizing.

Make a choice to either keep, sell, or rent your home.

Many people in their golden years prefer getting a lump sum of cash once they sell their current home. Although it’s important to recognize that selling can have huge costs, like realtor commissions of 5-6%, closing costs, and capital gains taxes.

Remember if you have a capital gain from the sale of your primary residence, you may be able to exclude as much as $250,000 of the gain from your income ($500,000 on a joint return for married couples).

Selling your Home

If you sell your home, you may miss the opportunity of building more wealth and a monthly passive income by using your home as an investment property. It may certainly be worth your while to do that. Another option is if you have lots of equity appreciation, pull cash out and buy a smaller rental property.

Additionally, if your home is in a buyers market and it takes longer to sell your home to buy a lower-priced home, consider a short-term bridge loan. This method works well for owners whose monthly income doesn’t qualify, and you’re moving to an area or home that has a much lower price.

An example is a recently retired couple on a fixed income in Orange County, CA owns a home that is worth $1.4 million with $800,000 of equity. They now want to relocate to a smaller home with a lower price in Arizona, Texas, or Colorado as it has all the amenities but only costs $450,000.

A bridge loan of $350,000 on their Orange County home along with their savings of $100,000 gets them in their new home. Once their California home is sold, they repay the lender and have their lump sum of cashback too.

Keeping your Home

Keeping your home as an investment property creates an income stream for you and offers your family a substantial sum of money. There’s a lot of positive variables such as refinancing the mortgage to a lower rate and raising the rent when there’s a new tenant.

Many of those who are going to retire soon may not be aware that when real estate is passed down, the taxable gains are wiped out when it’s inherited. For that reason, an excellent way to protect wealth for future generations is by keeping your home. This is a fundamental concept in estate planning. It’s always good to stay aware of any tax law changes by consulting with an estate planning expert.

Renting your Home

If you need to access some of the equity in your home for cash, another investment, or a large medical expense look into refinancing or getting a second mortgage and then rent out your home. The rental income should take care of the mortgage and the costs of maintaining the home.

Maybe you can add a separate detached studio to your existing home and rent that out. The cost to build and improve varies from $50,000 to $100,000 depending on your city. The prospective rent should be able to repay the expense within 5 years while your home appreciates the addition.

Consult with the best professional partners for downsizing.

Once you make your mind up on if you should sell or hold on to your home as an investment property, now you have to speak with professionals so that you can reach your goal.

If you’re leaning towards selling your home, get in touch with a local real estate agent with good reviews. Ask them what they really believe they can sell your home for, how long it takes in your local market, and what can you do to sell it for the highest possible price.

You also should also speak with local movers, your tax professional, a mortgage lender, and an estate planning attorney depending on the value of your current home and future home.

Buying a home is not always an easy process. When you add to the equation of selling your home and buying another one simultaneously, it makes the process a true challenge. The U.S. has approximately 90 million homeowners. If you’re among them and moving is a necessity, there’s a real chance you could be dealing with this problem.

Selling your home first makes qualifying for a mortgage easier, but it also means you’ll need to find and move into a short-term rental with your stuff or put some in storage. You’ll have to stay in these new digs somewhat disorganized until you find your next home.

Buying a home first means that your personal belongings will be moved once into the new home. It is a lot easier physically and mentally, but it also could require you to be paying two mortgages until your current home is sold. This will affect your debt-to-income ratios and may make it harder to qualify for a new home loan.

If all of your down payment money is tied up in your existing home your down payment can be difficult to come up with. Sometimes, you must find a new house quickly to move into for a new job offer, or you found your dream home and want to make an offer before it gets away. When you buy a new home before selling your current home, you may need to consider reducing your debts by lowering your risk.

The following are some popular choices homebuyers make:

Contract contingency

If you want to make an offer on a new house, but you don’t want to buy a new home until your existing home has sold, you put into the purchase offer that the new home purchase is contingent on the sale of your home. This is the most common way people do it.

In a hot seller’s market, where there are many other motivated buyers with accepted offers being typically above the asking price the seller may not accept this contingency. There’s not anything positive about a contingency for the seller. However, contingencies of selling your home work better in a buyer’s market.

Generally, if your contingent offer is accepted and another buyer submits an offer without a contingency, you should be given a 24-hour opportunity to remove the contingency and buy the home. If you don’t remove it, the seller has the option to enter into a contract with the other buyer.

Make the most of your financial strength

If you have deep enough pockets to handle two mortgage payments at the same time, you may decide to just buy the new home prior to selling your current home. Some people just hire a realtor or property manager to rent out the older home at closing to help pay for it.

Bridge loan — If your financial situation requires you to sell your current home and use the proceeds for the new home, you may want to consider a bridge loan. A bridge loan is a short-term loan and is designed to be repaid once your current home is sold. Because not every lender offers this loan, only certain mortgage companies and financial institutions will be able to help you.

The bridge loan works great for homeowners who want to use the equity from their existing home to make a large down payment on the new home or pay for it all in cash. This makes it possible for homeowners to proceed and buy the new home even if your home hasn’t sold yet.

Another solution is to use your home equity line of credit that you’ve already opened months ago. This option tends to have a better rate and lower fees than a bridge loan. Either way, you’ll need excellent credit above 700 and a lot of equity in your current home.

The lingering problem is you will be responsible for paying both mortgage payments until your old home is sold. Purchasing a new home and selling a current home isn’t always easy. A lot of factors come into play when buying a home.

There are two parties. The buyers and sellers, along with potential repair or appraisal issues during the inspection periods and market conditions. Nonetheless, homeowners frequently deal with both issues and you can too.

A fourth option is to rent back the home you just sold from the new owners. This is called a seller-leaseback. You are allowed a maximum of 60 days after the sale if the new owners bought it as a primary residence. Otherwise, if it is a second home or rental for the new owners you can legally stay longer giving you more time to find your next home.


Since buying a home is always a big investment for most people, prepare in advance as much as you can. Fix any repairs you put off so this doesn’t hold up the sale or give the new buyers a credit.

Since this is a double transaction it is highly recommended that you use an experienced real estate agent. Not your friends or relatives, but agents who will know what to do beforehand during the sales.

It’s super important to understand that when it is easier to sell a home, it is also hard to buy one. It works the opposite way too. Recognize which type of market your neighborhood is in, and work on the challenging issues first.