There are good reasons to own a home in retirement. But there are also plenty of arguments for renting. The latter may be less expensive if it means you don’t have to pay for maintenance and repairs. Owning, however, can be less stressful if you don’t have to worry about a landlord raising your rent.
Whichever route you go, housing costs will be one of your major monthly expenses in retirement. Here are some factors to consider when making a rent-versus-buy decision.
- Housing costs will be part of your retirement budget, whether you rent or own.
- Fluctuations in market value, unexpected maintenance expenses, and insurance deductibles can increase ownership costs.
- Though homes can be valuable assets to own, they shouldn’t be purchased primarily for investment.
- Owning offers stability, tax benefits, and equity, among other perks.
- Renting provides more flexibility and liquidity, and you'll spend less money (and time) on maintenance.
The first step in analyzing homeownership versus renting is to determine how much you want/have to spend after paying taxes.
Starting with returns filed in 2019, interest on qualified mortgages of $750,000 or less is deductible for a couple filing jointly. (If you bought your home before Dec. 16, 2017, you can still deduct interest on a $1-million-or-less mortgage under the previous law.) Property tax deductions, once a tremendous boon to taxpayers (especially in affluent areas), is now capped at $10,000.
Being able to deduct the mortgage interest and property taxes on a home you own means that your monthly budget will go further because you will get some of your money back in the form of a deduction come tax time. Because rental costs are not tax-deductible, no calculations are required.
To calculate the worth of a pre-tax budget when you buy a home, determine the marginal tax bracket, deduct that percentage from 1, and divide the budget by that amount. As an example, let's take a couple that files jointly and is in the 22% tax bracket for their 2019 taxes.
|Step#1: Net After Tax Budget||Step #2: Divide Budget by 0.80 (1 minus Tax Rate)||Result: Pre-Tax Budget|
|Ownership||$2000||$2000 / 0.80||$2500|
Risks to Consider
In theory, buying a home gets you more for your money than renting. But homeownership also entails substantial financial risks. Issues such as fluctuations in market value, unexpected maintenance expenses, and insurance deductibles can increase costs over and above those of renting. And whichever option you pick, don’t forget to plan for inflation—rent, taxes, and insurance costs all go up over time.
Another major issue is the maintenance risk associated with ownership. Renting is like buying an insurance policy against maintenance because renters have no liability for regular maintenance costs, equipment failures, or catastrophes such as storms or floods. The landlord has to worry about those unexpected costs. So do homeowners.
An Investment Opportunity?
Though real estate can offer good investment opportunities, a residence shouldn’t be purchased only for that reason. Housing is an unavoidable cost of living, and liquidating an investment asset shouldn’t involve finding another place to live. Retirees should best not factor in the investment upside of ownership when planning for housing costs.
“One of the biggest myths of homeownership is that it is an investment. It isn’t,” says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Massachusetts. “Owning a home that you live in is an expense, not an investment. An investment is one that generates cash flow. Sure, there are some benefits of owning a home, but when you factor in the costs, tying up large amounts of capital, illiquidity of the home, and that house prices don’t always go up, it makes for a much less attractive ‘investment.’”
To truly use a home as an investment, a homeowner would have to buy low and sell high—buying and selling homes opportunistically. By selling a home to make a profit when prices are high, however, one takes the chance of becoming priced out of the market if prices continue to increase. Those on a fixed budget, as most retirees are, may not be able to purchase another house or apartment and will find themselves dealing with a landlord instead
In some ways, renting can be the economic equivalent of shorting a stock. If you believe housing prices are headed lower, you could rent a residence, wait for prices to fall, and buy a home later. Being wrong about the direction of housing prices and ending up paying a higher purchase price is similar to paying a higher price for a stock to cover a short position.
Cashing Out and Liquidity
Other financial benefits of being a tenant include freedom from worry about housing market conditions and about liquidity. Selling a home can take a long time; it also involves lots of paperwork, and most real estate agencies charge a commission, reducing the return on investment. Sidestepping these entanglements when it’s time to move can definitely be worth it.
Some retirees live solely on pension money—Social Security benefits, annuity payouts, or a government or union plan, so they don’t always have large sums of liquid cash. Without sufficient assets on the sidelines for unexpected expenses, the regular costs of owning a home could be ruinous.
Advantages of Owning
If you're one of the 70% of homeowners who go into retirement mortgage-free, the question of renting vs. owning may seem less complicated at first. Still, the fact that you have no house payment doesn't make this a no-brainer.
You'll have to consider property taxes and maintenance costs. And, the older your home, the higher those upkeep expenses could be.
Still, it's easy to find arguments for staying—especially if you live in a house you own now (and have no health-related reason to leave). Here are some other key arguments.
If you own your home, you'll likely enjoy more stability and control. You won't have to worry about a landlord bumping up the rent. Likewise, a landlord can't sell the residence out from under you. You still have the option to move, but it will be your decision—not a landlord's. Also, you can’t remodel a rental, at least not without the owner’s permission.
For some retirees, it's important to leave an inheritance. Others want to use accumulated home equity to take out a loan, line of credit, or reverse mortgage. These are situations in which ownership makes the most sense. In areas where property values are increasing rapidly, owning allows you to possess an asset that appreciates. And, of course, it also means you can avoid rent increases that are so common in hot real estate markets.
One of the benefits of homeownership is that you can deduct mortgage interest and property taxes on federal returns. Though the 2017 tax bill lessened these benefits somewhat, they still exist. Other deductions, including mortgage points, can also work to lower the amount you owe to the IRS. You get none of these tax perks if you rent.
The degree to which you're emotionally tied to the idea of homeownership is an important, nonfinancial consideration.
Maintenance costs, time
Advantages of Renting
Selling your home and moving into a rental has its points. If you currently rent, you know these benefits. But if you're a homeowner contemplating jumping ship, here are some reasons to consider.
Renting may make sense if you're an empty nester, ready to downsize, or unsure of where you'll spend your retirement years. You may want to move away for better weather (or a lower cost of living) for some years, but also be easily able to move closer to your family later on.
Your health—or that of a family member—can also be a factor if you believe you may need to move soon to receive or give care. Many assisted living, continuing care, or independent living communities are rent-only, leaving you with no choice if that’s where you'll live.
If you do end up renting, a long-term lease will lessen the uncertainty of rising rents.
It’s important to compare the cost of renting versus owning in the place where you plan to live. According to a report from Trulia, renting was less expensive in 98 out of 100 cities with a large population of residents 65 and older. It’s worth noting that in the South, though, owning is typically less expensive than renting.
When you rent, you will likely not have to pay for major-league, structural maintenance. On average, homeowners spend between 1% and 4% each year on upkeep. The older the home, the higher the percentage. One caveat: Read the lease carefully before you sign and make sure your landlord is responsible for all (or nearly all) maintenance and repairs, especially if you're renting a house.
It's not just the cost. As you get older, your ability to do any of these jobs yourself will inevitably decline. Maybe you don't want to live somewhere that finds you regularly standing on ladders to change the light bulbs or shoveling snow from the sidewalk. That's when a super or building handyman can really help.
Renting may free up money that you can invest. That keeps you liquid and can increase your overall income during your retirement years. Investments often grow at a faster rate than real estate appreciates, making them an even better use of your money. Also, ownership puts you at risk in the event of another housing-market crash—something renting does not do.
Little maintenance expense, responsibility
Flexibility in moving
Fewer costs, taxes
Unpredictable rent increases, eviction
No tax benefits
Inability to customize home
The Bottom Line
For many people approaching retirement, the decision of whether to keep the family manse or downsize to a smaller place is a difficult one. If they do decide to move, the stress and expense that can come with homeownership come into play. Whether to own or rent a home in retirement involves several considerations, such as:
- What is the after-tax budget for renting or owning?
- Is the home a potential investment opportunity or just another expense?
- Which risks come with homeownership, in terms of unexpected costs, and can the budget withstand them?
Internal Revenue Service. "Publication 936: Home Mortgage Interest Deduction." Accessed Dec. 13, 2019.