Whether to buy or rent is a question we ask several times in our lives as we consider our housing needs. This blog post will have a retirement focus on the question, but even if you are a first-time home buyer, it never hurts to think that far ahead, especially if you hope to stay in your dream home forever! I will look at the pros and cons of each option and briefly discuss some ways to make a decision that is right for you and your situation.
Having made the decision that in order to “right-size” our lifestyle for our retirement years, we need to move to a home that is smaller and demands fewer resources (time, money, etc), I started researching the question and got 153,000 Google results!
Obviously, I am not the first one to consider this question, but since most of these hits are aimed at first-time home buyers, I searched for retirement-specific advice. I still found over 34,000 hits! Scanning the list, I found several names I consider pretty representative and authoritative, and below are some of my findings.
FACTORS TO CONSIDER
While the right answer for you involves many variables, I think the most important is the city or town where you are planning to live. Every location varies in terms of median home prices and rents, and the direction of the local economy. In a very general sense, renting is cheaper than buying on the east and west right coasts, where housing is especially expensive. But buying is often cheaper than renting in the middle of the country (there are exceptions, of course). Financially, the value of owning a home might increase in proportion to how long you plan to stay in one place. According to Kiplinger, ten years seems to be the pivot point. Renting makes more sense under ten and buying is best if you plan to stay put for at least ten years.
You may want or need the flexibility of being able to move on relatively short notice. Perhaps you want to be near your grandchildren, but your son or daughter works for a company that might transfer him/her at any time. In that case, renting might make more sense, so you can easily pick up and follow them.
However, if you are like me and plan to stay near where you currently live for reasons previously discussed, then the decision is not so clear. How do you decide?
One factor is customization. How important is to you be able to decorate and remodel your home to suit your personality or needs? Renters are limited in what they can do in this regard. Buyers are only limited by their means. This is particularly important if you want to age in place. Renters won’t be able to make the necessary modifications, like better lighting, grab bars, wider doors, and roll in showers.
AARP has another interesting take on the subject. Later in life, your home as an investment takes on less importance, since making a profit and moving up to make room for a growing family no longer is a priority. Also, as the 2008 financial crisis illustrated so well, you can’t really count on the value of your house increasing more than inflation, if at all.
If you currently own, there are several ways you can use your equity for your retirement years. You can use all or part to buy a new home or invest for future income to pay for rent instead. A future reverse mortgage is possible for future income, but that is betting your house will be worth enough in the future to generate enough income. The opposite could happen, so in my opinion, it does not necessarily make sense to have so much of your nest egg tied up in an il-liquid asset. Rents will go up with inflation, but so will homeowner’s insurance and property taxes.
To summarize, home ownership certainly has its advantages:
- The equity you build in your home can become a source of future income or a legacy for your heirs. If you aren’t underwater on your mortgage, you can use your home to take out a line of credit when you need money. Similarly, you can sign up for a reverse mortgage and use your home as an income stream of sorts.
- Stability of costs: While your outside costs, like property taxes and maintenance, might fluctuate, if you have a fixed mortgage, or you own mortgage free, you won’t run the risk of your actual housing payment increasing during retirement. 70% of homeowners 65 and over enter retirement mortgage-free and don’t even have a payment to deal with at all.
- Customization: You can customize your home any way you want, including making modifications that will allow you to “age-in-place” and stay independent longer. (The latter is a great subject for a future blog)!
But buying also comes with a downside, especially in retirement:
- Maintenance can be costly. The average homeowner spends anywhere from 1% to 4% of his or her home’s value on annual upkeep, more if your home is older. As you age, your ability to tackle maintenance items yourself might decline, which will only add to your costs. A major repair, like a new roof or furnace, might creep up on you, which can be a pretty scary prospect if on a fixed income.
- Property taxes and homeowners’ insurance cost won’t ever go away and will probably increase. Here in Alabama, you can get property taxes waived if you are under certain income limits, and similar policies exist in other states. Taxes can rise over time, even during periods when home values decline. You only have one or two votes on the matter.
- Risk of decline in value: All it takes is another housing market crash to crush your property’s value. You may be better off finding a cheaper rental and using whatever money you save as a source of income or potential gift for your heirs.
- A house ties you down. It is harder to move if you have to sell your home first. If there is a chance you may need to relocate for any reason, this is a big negative.
Pros of renting
- Housing costs are limited to your rent and utilities. Maintenance is not at your expense.
- Flexibility on a fixed income. If the rent rises faster than you can handle, you can move somewhere cheaper.
- Renting can be cheaper than a house payment in most markets. Of course, if your house is paid for in cash, you must look at the potential rise in home value over time versus your rental costs. There are calculators online to help with that.
- You can leave on relatively short notice and move elsewhere. Some people have been known to use this feature to be long-term tourists, experiences what is like to live in many different cities, even overseas, before settling down!
- If you sold your long-time home and invested the proceeds well, you may have extra income to pay other expenses, like health care costs. For example, $300K netted on your home sale, invested at a 6% return, is an extra $18K a year (before taxes) to spend on rent or travel, and you still have the principal!
- Rental properties might have amenities you would like using but not maintaining, like pools and gyms.
Of course, there is always a downside:
- Your rent expenses do not provide you any future value. If you sold your home and did not net enough to earn a useful income from the invested proceeds, buying with a mortgage might make more sense, especially if you plan to stay put for more than ten years or (its never too late to start building equity).
- Rents can (will) go up. You can expect them to rise at least at the rate of inflation, more or less depending on the local economy.
- Limited design options: You are potentially stuck with a crappy stove, poor lighting, and limited interior paint and other decorating options.
- Maintenance may not be timely. You are at the mercy of the property owner to fix something when it breaks. If you are stuck at home all day, a faulty toilet or non-working heat might be a huge burden!
While your personal values and emotional responses to these factors are important, here are some useful facts to help with the financial (perhaps the only objective) side of your calculation:
- House appreciation, which has run an average of 5.4% a year since 1968, according to the National Association of Realtors. Meanwhile, the annualized return for Standard & Poor’s 500-stock index was 10% during that period. (Warning: Past results do not guarantee future results, but the odds are still in our favor on this accord, I think, especially if interest rates rise as predicted).
- One study shows that renting tops buying for the first ten years, according to one analysis. After ten, buying with a mortgage is better as such a buyer usually have more assets starting with year 11. (Folks who pay all cash with no mortgage lag a bit). This study assumed that investments would appreciate faster than property values, (6 to 10% investment returns versus 5.5% real estate) so if you are a very conservative investor, this may not be true for you.
- Real estate appreciation is typically not taxed on your primary home (currently), but investment income is taxed every year unless you put your money in ROTH IRA. Check with your tax advisor!
- If you are entering retirement at age 65 as an active individual without any major health issues, you can probably expect to stay relatively independent for more than ten years. By age 85, 22% of seniors are no longer able to live independently at home and require care and support services, either in a nursing home or assisted living facility.
- Designing your home using “age in place” concepts can extend your time living independently in your home.
- Social security benefits might need to be cut. or adjusted by Congress in future years. According to the Social Security Administration, by 2034, Payroll taxes collected will only pay about 77% of scheduled benefits.
I mention the last one because if you are depending on social security for a significant portion of your income, having equity in a home as a potential source of income via a reverse mortgage may be a valuable back up plan should your benefits are cut, or taxed.
HOW TO DECIDE BETWEEN PROS AND CONS
If you have ever used the pros versus cons method to make an important decision, you have encountered the issue of how to weigh each factor. Weighing pros and cons are highly subjective. I suggest you and your partner do it separately and compare results or do together. Here is a simple:
- Write pros and cons in separate columns.
- Assign a positive score to pros and a negative score to cons
- Add up each column and then add the cons (+) to the pros (-)
- If the answer is positive, the pros win. Negative, and cons win the day!
The internet is full of examples of how to do this, so I will not do that here. Here are a few good examples:
As you can see, deciding to rent of buy in retirement is a big decision, often a daunting one. You may already have a feeling for which way you lean, especially if you and your partner have discussed the pros and cons, so going through an actual pro vs. con exercise may not be necessary for you. This is often as much an emotional decision as a financial one. However, we will do the financial calculation based on what we can net on our house and compare it to what is available to buy and rent in our desired neighborhoods. That somewhat objective methodology will hopefully help us overcome any emotional attachments we might have with one idea or another.
I hope you have found this blog post useful. If you have any comments or suggestions, please share below. If you like what you read, please follow me as I continue to explore our approaching retirement and our adventures along the way!