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VICKY AND I ALWAYS knew our retirement home would need to be near our two sons and their families, so we could be part of our grandchildren’s lives. It’s taken a few years and a pandemic, but we finally made that happen.
We purchased a new home in Monmouth County, New Jersey, in September 2023. We’ve now moved in, and we’re already enjoying more time with our grandsons. We’ve also met some very welcoming neighbors. After three months, we’re convinced we made the right move.
It wasn’t, however, a great time to buy a home. Housing inventory was tight, so sellers had the advantage. Mortgage rates were high, and have risen further since we closed. A Wall Street Journal article last month claimed that housing is “less affordable than any time in recent history.”
When we started looking for a new house, I spent a lot of time pondering how to finance the purchase. We looked at a wide variety of homes. We saw older condos priced in the $300,000 range. We looked at some new, high-end townhomes on a golf course, with elevators, that started at $1 million. We also looked at older single-family homes, mostly ranch style, priced in the $700,000 to $900,000 range. This latter group invariably needed some significant upgrades.
I mentally grouped the homes into three categories based on price. Depending on where you live, these prices may seem low, high or just right. But they’re the reality in Monmouth County. The median selling price in November 2023 was $655,000, though there’s a very wide range around that median.
The three groups I identified were: low, meaning $400,000 and below; high, at $1 million-plus; and everything in between. The price of the new home we purchased would likely drive what we’d do with our beach house. If we purchased a lower-priced home, we could afford to keep our beach home as a vacation property. At the higher end, I would have been uncomfortable owning and maintaining two expensive homes, so we most likely would have sold the beach house.
In the middle, there was considerable gray area. We theoretically could afford two homes, but it would require a monthly outlay that would likely keep me up at night. So, of course, the new house’s purchase price was $779,000—squarely in the gray zone. After much discussion, we’ve decided to keep the beach home. We’ll rent it out during the summer to generate additional income that’ll offset the expense of owning two homes. Our favorite seasons at the beach house are fall and spring, so this is a good compromise.
We took out a mortgage to buy the new house, and we still have a small amount owed on the beach home’s mortgage. I’ve spoken to our mortgage person about refinancing the beach house so our new, primary residence has no mortgage. This makes financial sense because there’s a strong tax incentive to have a mortgage on the rental property. Expenses incurred in owning a rental property, including mortgage payments, are deductible against the rental income received. Our hope: Interest rates will drop in the coming year before we refinance.
Enjoyed the article. We had to make similar decisions with investment properties. One point of correction – mortgage “interest” payments, not mortgage principal payments, are deductible against the rental income.
James, thanks for reading and commenting. You are correct – I should have been more specific in describing the mortgage interest deduction. And as several commenters mentioned, it is qualified acquisition interest that is deductible.
You can’t really go wrong in Monmouth County. A great area. Just wait until you start learning the ropes – the restaurants, the parks, the back streets to use, and all the unique features and benefits around you. I grew up there, and would have returned to the area but for family considerations. One day, maybe your primary house can be a beach house there, or maybe a river house. There is a great deal of waterfront around the County, but the prices (and taxes) are way up there.
Martin, thanks for reading and commenting. I’m an explorer by nature and we’ve started to find some of the tings you mention. Beyond the water attractions, 10 minutes west of us is beautiful horse country. Maybe some day we could be Springsteen’s neighbors.
The nice thing about decisions like this is that they can be revisited. For example, if as time goes by you feel burdened by the management or costs of the beach house, you can always reconsider selling it. But it sounds like you have it figured out pretty well. Slick move with refinancing your vacation home so that you no longer have a mortgage on your primary home.
Thanks for sharing. My companion article talks about our thinking on ownership of the beach house.
Buying a house, and staying close to the kids, seem like opposing goals. In retirement my plan includes renting, specifically because I want to be around regardless of where they might move. If they move far apart, I will alternate years in each location. It will also keep me from being bored, and just walking around the same suburb until I die.
Nick. Thanks for sharing. That’s an interesting idea. We will continue to evaluate our situation as it evolves. Right now our kids seem pretty settled
Rick, congratulations on finding the right new home. I wish you the same success with sorting out the confusing tax variables you write about in your companion article.
Thanks Edmund
Rick, between your other article today and this one, can only imagine the spreadsheets over the last several months. Hopefully not so many headaches as it might seem! Great articles and glad you’re happy with your decisions.
Thanks Michael.
Good luck with the houses. I am delighted that I no longer own one. At 76, and single, I was well past wanting to cope with the maintenance (I never did the yard work myself, but it was another expense). If I have an issue with my apartment at the CCRC I file an on-line maintenance request. So far the staff have been very responsive.
Thanks Kathy. We had our first snow storm last night. The landscaping crew had our sidewalks cleared by 8AM! It’s my first experience with an HOA. So far so good!
Be sure to double check the tax code on the deductibility of the increased interest expense due to refinancing. I could be wrong, but I thought the increased interest expense was only allowed if the loan was used for “qualified” purposes such as improving the rental. But like I said, I could well be wrong.
Thanks for the comment. I will definitely keep that in mind as we move forward.
IRS Pub 535 Chapter 4 –
The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan’s proceeds.
If Rick were to refinance the beach house mortgage the funds allocated to paying down the the new home mortgage does not appear to be qualified acquisition interest deductible on schedule A if he itemizes his deductions nor a business deduction on schedule E for the allocated non business part of the refinanced mortgage interest.
Being close to adult children and grand babies seems to me to be the factor I that I would give the most weight just as Rick and his wife did. Not knowing what the effect of the expiration of the TCJA at the end of 2025 could impact his decision.
William, thanks for sharing. I think I need to look at my options – we have some time. We are OK with our current finance structure. I was looking at optimizing my tax situation, but I may have misinterpreted the current rules.
Richard, after all you have gone through, I hope your sons stay put in Monmouth County. It takes us 50 minutes to get to our daughter who lives in the same area. Moving to our vacation home 6 hours away was never an option for us.
Dick, thanks for reading and commenting. When we moved to the beach house we kind of new that might be an interim step. We looked at townhomes back in PA, and almost stuck but decided to hold off. We waited until the kids seem pretty settled, but you never know what will happen. We’ve learned that we can adapt and make choices based on the data available. On the upside, we’re finding Monmouth County to be a really nice place, with lots of diverse things to do, and very nice people!