"Thirty years ago the house was the center of the financial plan. It was the best asset, the safety net. Now free cash flow is the center of the financial plan and housing takes a second priority, says Seth Streeter, cofounder and president of Mission Wealth Management in Santa Barbara, California.
"People are picking lifestyle over house. They want the flexibility to go to a coffee shop and work on their laptop, to visit their grandkids regularly, or take a cooking class in Florence for a week. People will give up a dream house for that."
There are various things, financial and emotional, Streeter says, that you must consider before declaring, "I'm selling my house."
Say good-bye to your stuff. "When you downsize, you have to deal with all your things. People forget how much they've accumulated. You're forced to simplify. This can be positive, but people don't think about it before they jump in."
Count up the transaction fees. The fees you'll pay to buy one house and sell another can include title search, realtor and lawyer fees. Make sure you include that in your financial plan.
Remember that rental means less stability. When moving to a rental, a lot of homeowners discount the impact of having less stability. The owners who rented you the house can decide to move back in. There can be other landlord issues. When you think about long-term care, that can be tougher. It's easier to have stability in a owned home. Streeter says, "Before 2009, not many people did this, but there's a new push toward renting. People are attracted to the flexibility of renting, especially if their home feels like a burden, not an investment."
Will you leave the family home in your will? "Many people plan to spend down their investments to fund their retirement, and they think of the family home as the one asset they will leave to the next generation. They say, 'At least the kids will get this.'" Before downsizing, be sure you're comfortable with not doing that.
Look at future space needs. What if your kids need to move home? What if your parents need to move in? You need to look at that too.
Get the complete financial picture. "Most people who are downsizing these days are doing it out of necessity, to free up assets to support them in retirement." It's essential to go through comprehensive financial planning and see what kind of home they can purchase, factoring in tax impact, the estate plan, and investment decisions. "People might save money on a smaller house, but they haven't factored in property taxes. If you're not working, you might not qualify for a mortgage, which is tougher to get without earned income."
Check the boxes, then relax and have fun. "People are excited about simplifying, having a turn-key house so they can visit grandkids. When you move, it can be bonding for couples." Now that the kids are out of the nest, they can reinvest with each other, making their house just what they want it to be. The key is to keep open communication about what you want. "Typically it starts as a financial communication, then turns into an emotional one. You need to understand whether you want to walk to restaurants or be remote and have a view."