01 Jul Investment home or mutual funds with extra money?

 Q. My husband is about 7 years away from retirement from his corporate job. He’s 60. Aside from contributing to our 401(k)s, we’ve been debating buying a vacation home as an investment property, which we would either sell or move into upon retirement. Does it make sense, or are we better off with mutual funds? I know that it’s hard to predict either real estate values or mutual fund performance, but in general, what is the better investment? If we forego the vacation home, aren’t we at a disadvantage in qualifying for a mortgage in retirement?

A. There is no easy answer to this one because there are so many moving parts.

Buying a vacation home is not only a financial decision, but a quality of life decision as well, said Steven Gallo, a certified public accountant with U.S. Financial Services in Fairfield.

He said real estate as an investment vehicle requires the investor to consider not only the cost of the property, but a multitude of other factors, such as the location and whether the two of you would be happy spending your retirement there.

You need to ask yourself about the current state of the real estate market in that location, your carrying costs for the property such as utilities, maintenance, real estate taxes and insurance, how often you’d use the property for vacation prior to retirement and will you rent it out when you are not using it.

“Because all of these questions will ultimately factor into the overall return on your investment, using a vacation home as a funding tool for your retirement can be very risky,” Gallo said. “Although the returns you receive on your mutual fund investments are uncertain and will vary based on what particular funds you are using, you will be able to make changes in those investments if needed quite easily.”

But getting out of an investment property if market values start to tumble or the costs related to maintaining the property get out of hand can be considerably more difficult he said.

Based on all that, he recommends you continue to use mutual funds to help achieve your retirement goals.

Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown, doesn’t have any easy answers, either.

She said to accurately decide what makes sense, you should consider doing a financial plan to see how this decision fits into your overall goals and objections. (You can find out about getting a free money makeover by emailing us at .)

“If you’d like to retire in seven years, and that is a priority, then it makes sense to see if you have enough savings plus additional projected growth to support your retirement,” D’Agostini said.

That’s because the greatest challenge in retirement is longevity.

“You may need to have your retirement savings support you for 30-plus years,” she said. “If you are cashing in some savings to purchase a vacation home, I would like to see how that affects your plan.”

She said in real estate, location is a huge factor for not only the projected growth of the asset, but also the potential rental income that could be generated, and associated costs to maintain the home. These should be included in your financial plan, she said.

“To be conservative, I wouldn’t include more than a 3 to 4 percent growth on the real estate, but some markets are flat, and some markets are more desirable,” she said. “You do not want to be stuck with a home that you decide not to retire to, particularly if it is not self-supporting.”

As for obtaining a mortgage in retirement, it depends upon your sources of income and your assets, D’Agostini said. Lenders will consider your cash flow as well as assets to see if you could support a mortgage in retirement.

Gallo said the mortgage could be harder to get when you retire, but that will also depend on many factors.

“If you currently own your home and are looking to relocate to a new location for retirement, you would most likely use the equity in your current home to make the purchase and therefore would need to borrow very little,” he said.

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This story was first posted in July 2015.