If you buy a second home now for retirement later, you could give yourself a hedge against home price hikes as well as a relatively low-cost retirement shelter with an equity cushion.

That assumes during ownership you can find tenants who'll pay enough rent to cover your investment costs. You'll also have to be able to actually use the property when you retire.

"Buying a retirement home while you're still employed is a wise investment, if you can keep it rented until you're ready to move in," says Valerie Patterson, senior producer of RealEstateJournal.com.

That means you'll have to find a property you can rent for an amount that will cover not only the principle and interest but also the bulk of property taxes, insurance, property management and maintenance costs, home owner association dues and any other costs, actual and estimated, associated with property ownership.

Patterson says if you can't secure a tenant, or if the rent you collect doesn't cover your monthly payments, even locking in a low interest rate now may not be wise unless you've got the extra income to cover the difference.

Don't forget to consider tax benefits that can help offset costs.

In addition to mortgage interest deductions on owned home values up to $1 million, tax deductible passive losses on rental properties are as much as $25,000. The passive loss amount does begin to phase out once your modified adjusted gross income reaches $100,000 and is completetly phased out once your income reaches $150,000 says Marie Sternberger, an enrolled agent from Sunnyvale, CA.

Sternberger says don't overlook non-financial considerations related to buying a retirement home now to live in later. Your heath, the climate, some unforeseen event or change could prevent you from moving into your second home at retirement time.

"You would have to sell and pay taxes on the gain, but you could take any passive losses you had not been able to take advantage of. You could do a tax-free exchange of like property somewhere else. You would have some options, but I would be leery of buying a retirement home way in advance of retiring. That's just my opinion," Sternberger said.

Patterson said the upside to buying your retirement home now is that you can count on having someone else paying your mortgage for as long as you rent it. You'll inherit a home with at least a part of the mortgage already paid and a relatively low interest rate locked in.

"It's a good idea to get a head start on retirement living. Your favorite location might be a lot more expensive in 10 to 15 years when 73 million baby boomers begin retiring," said EscapeHomes' CEO David Hehman.

Appreciation may also help offset some of your costs, but to maximize your investment as a retirement nest egg, you probably don't want to tap your home's equity unless it absolutely necessary for some dire financial need.

"However, if home prices fall, you might wind up paying more for your house than you needed to," Patterson cautions. "But it's far from certain that prices will fall, and even if they do, they could easily run up again in the future," she said.

In any event, buying a retirement home now to live in later begins with even more considerations.

Published: February 5, 2004

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.