When the kids are gone, you might start thinking that your four-bedroom family home feels a bit too large, not to mention a money drain. Probably you need less space, and you want someone else to take care of it. But now you need to decide if you want to buy or rent.
Owning real estate is a big part of the American lifestyle. However, ownership is more expensive than most people realize.
When you are getting closer to retirement it may be more important to secure income from your retirement portfolio than to drop money into a new house.
Besides making a financial decision, you need to think about how it will fit into your new lifestyle. Do you love to own your place and fix it up the way you want it? Or it will be a big relief not to worry about yard work, broken faucets, or a water heater?
If you’re getting closer to retirement you might already have an idea how you want to spend your days. Buying a condo by the water or on a golf course might fit your retirement lifestyle perfectly. Other people would prefer to sell the house, cash out, and spend money on travel. So, renting would be a better option for them.
How to figure out if you are better off renting or buying?
Factors to consider as you decide
When deciding whether to buy or rent, calculate how much is your retirement income and then how much income you will need to pay the bills.
Keep in mind that the housing cost is the biggest category in your budget. Then you should look at the home prices in your new location and compare it with the yearly rent in the same community.
Here are some key factors to help you with your rent or buy decision.
Renting in retirement:
Whether you want to rent a smaller house or a downtown condo, you need to decide what you want out of a rental. And again, it will depend a lot on financial and emotional matters.
The upside of renting
Your money is not tied up. Owning a home in retirement is not always financially wise. If renting is cheaper than owning, you’ll be better off investing your retirement funds and letting it grow.
It can increase your retirement income because investments often grow at a faster rate than real estate. The only money you tie up is your security deposit. With the fixed cost of rent and no taxes or insurance, you can have enough cash for travel, activities, or charity.
For example, you sell your house and get the sale proceeds worth $500,000. If you decide to rent, you can have that money invested. Assume a 5 percent annual return on your investments or $25,000 which means a monthly return of $2,083 ($25,000:12 = $2,083).
If you can rent a comparable home for that price, you would be well financially without the hassle of ownership.
No maintenance, renovations, or repairs. When you became a tenant, you hardly had any responsibilities, besides paying rent on time.
So, when the water heater needs to be replaced or the faucet leaks, you just pick up a phone and call the landlord. You do not need to worry about the upkeep of the rental building or any repair costs. You can spend time and money on things you like to do.
Less space and more amenities. As a retiree, you do not need a big car to drive kids around and you do not need a third and fourth bedroom when it is just one or two of you.
You are more likely to want a pool or gym somewhere on the property, and a janitor who will fix a leak and take care of the yard.
In general, rental units in apartment buildings or condominiums tend to be located closer to town centers. You can walk to the coffee shop, museum, library, or the bus stop a block away from your place.
Lifestyle flexibility. Lifestyle flexibility is a key advantage to everyone who rents. For retirees, flexibility means having the option to move to be near children, grandchildren, or family members. The other option is to spend different parts of the year in different places or abroad.
When you need a change in your life, moving out of a rental can be much faster than moving out of the house. Landlords cannot stop you from moving out even though it may be a fee for breaking a lease.
You do not have to worry about selling or renting out your home. On the other hand, selling a house can take months sometimes years, depending on your house conditions and the local housing market.
The downside of renting
Annual rent increases. Usually, rents go up every year. When you own a home, your mortgage is a fixed payment, and you can only expect an increase in taxes and insurance. While renting, you could expect a 3 to 10 rent percent increase every year.
Unfortunately, you do not build any home equity with every payment. Besides, when the real estate market is booming and prices are going up, you do not get any appreciation as a renter. Your landlord builds equity and gets all appreciation from the rising real estate prices.
No feeling of security. Dealing with a landlord is not always easy. Your landlord can decide at any time to sell the place, force you to end the lease, and find another place to live.
Inconveniences of renting. Renting a place might include many inconveniences. You will need to get permission from a landlord or property manager if you want to re-paint or decorate your place.
Some rentals do not permit pets or have a strict pet policy. You might deal with issues like noisy neighbors, poor maintenance, shortage of parking places, and more.
Owning in retirement:
When you start thinking about downsizing you need to decide whether homeownership or renting makes the most sense for your situation. Like any decision, it will depend a lot on emotional and financial issues.
The upside of homeownership
Sense of stability. Homeownership gives you a sense of security and stability. Many people feel safer knowing that they own their home. There is a sense of security in knowing that this is your home, and nobody will kick you out of it.
Furthermore, you do not need to worry about a landlord bumping up the rent or starting a major renovation and asking you to move out.
Fixed mortgage payments. Many retirees worry about mortgage payments and how to afford them in retirement while living on a fixed income. But if your mortgage is paid in full, you will only need to pay property taxes and insurance.
However, if you still have a mortgage and have to make mortgage payments every month, it will come as a fixed payment.
Home equity. There is another important advantage of homeownership – building equity. With every mortgage payment, you accumulate more home equity. Then if you need it, you can take a home equity loan, line of credit, or even a reverse mortgage.
Increase in value. Everyone knows that housing prices are going up. In many popular places, you can see a significant increase in value if you own a home for 10 or 15 years.
Control over updates or improvements. If you own your home, you can make any kind of improvements or renovations without asking the landlord’s permission. The same comes with pets. There are different kinds of policies and restrictions on what kind of pets are allowed in rental buildings.
Read More:
- Moving in Retirement? 5 Things to Consider
- Should I Pay off a Mortgage Before Retirement?
- Is It a Good Time to Sell and Downsize Your Home?
The downside of homeownership
Your money is tied up. If you decide to buy a house or condo in retirement you will be using a big chunk of money for a down payment or paying full price in cash. Your money will be tied up in that home for a long time.
Think about where the money will come from to pay your housing expenses. Keep in mind that the insurance, taxes, and upkeep of the house go up every year.
Also, it is going to be harder to get a mortgage when you retire because you do not have an income. So, if you consider buying a home, make sure to do that before you stop working.
The costs of repairs, maintenance, and renovations. We all know that owning a house means repairs, maintenance, and yard work. It could cost thousands of dollars if you need to replace the roof or your heating system. Maintaining the house and the yard takes time and money.
Moreover, you might want to renovate your new home and make it more personal. But it could be expensive when you live on a fixed income.
Hard to sell. Your home is a real estate investment and real estate is not considered a liquid investment. It cannot be quickly converted to cash like stocks or bonds. As a result, it is hard to sell when you need money.
There are a lot of tradeoffs between renting and owning. There is no right answer for everyone. You have to decide what fits your lifestyle and cost of living.
Read More Related Posts:
- 6 Ways to Fund Your Retirement Lifestyle with Home Equity
- Rent or Buy in Retirement
- How to Adjust to an Empty Nest Lifestyle
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