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Should You Rent or Buy in Retirement?

Planning your retirement living arrangements in advance can save you time, money, and stress. However, before you rent or buy a house, make sure you consider the pros and cons of each option, and their potential impacts on your retirement plans.
Buying in Retirement

Deciding between owning and renting a home is an important decision for anyone heading into retirement. As you approach retirement age, you need to be aware of the advantages and limitations of both options. More specifically, you need to determine which living situation best accommodates and supports your personal financial circumstances, quality of life requirements, and long-term retirement goals.

However, before you choose a retirement living option, it’s a good idea to evaluate your personal financial position – namely, your net assets, current and projected cash flow, and annual retirement expenses. Once you have collated this information, you can create an estimated budget for renting or purchasing a home. If you require a more accurate budget calculation, incorporate an upper expense limit for unexpected rent increases, interest rate hikes, or property value declines.

Pros and Cons of Renting a Home

According to data from the Pew Research Center, close to 37% of U.S. households are renters. Since 1990, the largest portion of the rental market increase has been retirees in the 55 to 64 year old demographic. Rising property prices, increased debt levels, and lingering fears of another property market crash appear to be the main drivers for declining homeownership.

The Advantages

Like any property transaction, the advantages of renting will vary depending on your personal circumstances and financial objectives. Here are three of the most common advantages cited by retiree renters:

  • As you approach retirement, you may want to move into a smaller rental house or apartment. Being able to downsize gives you the chance to secure a home with less maintenance, lower rent, and a more convenient location.
  • The cost of moving between rental properties is negligible in comparison to the transaction fees incurred when buying or selling a house.
  • When you’re a rental tenant, your landlord is in charge of the household repairs and general building condition maintenance.

The Drawbacks

Although renting a home may appear to complement your retirement plans, there are several drawbacks to renting that you should keep in mind:

  • Weekly rent often increases upon lease expiration and rental payments do not contribute to equity in your home.
  • As you get older, the chance of being affected by a physical or mental health issue will increase. If you are struck down by unexpected mobility issues, your rental home may not have the accessibility features you require on a day-to-day basis.
  • As a renter, you have little control over the noise level and activities of your neighbors. While regular privacy disturbances can be reported, the review process is often long and ineffectual.

Pros and Cons of Buying a Home

Although the overall rate of homeownership is declining, enthusiasm for buying a home is actually growing, indicating that most renters are only deterred by the high upfront cost of buying a home. In fact, a 2017 survey of 2000 long-term renters showed that the most common financial regret amongst renters was not purchasing any property.

The Advantages

Compared to most long-term rent arrangements, choosing to buy a home can actually work out as the cheaper option. We’ve broken down four key homeownership outcomes that can save you money:

  • If you purchase a property via a mortgage, the loan interest can be deducted on your tax return. Other state and local tax bills related to a property purchase, up to the value of $10,000, are also classified as tax-deductible expenses.
  • Owning a home means that your net worth will benefit from any increases in the underlying value of the property.
  • Unlike rental payments, your monthly mortgage repayment increases your equity in your home. If you require a lump sum or line of credit during your retirement, you can tap into your home equity by refinancing the mortgage or by applying for a home equity loan.
  • As the owner of your retirement home, you are free to redecorate, landscape, and renovate whenever you want. This is especially important if you find yourself needing a more accessible home.

The Drawbacks

Unfortunately, there are some downsides to owning your home as a retiree. Some of the more common disadvantages include:

  • Home repairs and general maintenance are your responsibility. As a retiree, you will need to pay for repair materials and contract workers for any strenuous maintenance work.
  • Unlike a rental property, owning a house requires a significant upfront investment and long-term commitment. Concentrating your assets in a non-liquid property can mean more risk exposure than you may be comfortable with.

Still Unsure? It Might Be Time to Talk with a Professional!

Still can’t decide between owning and renting in retirement? If you are a current or soon-to-be retiree, you might want to consult with an experienced real estate agent. A professional agent can help evaluate your financial position and provide expert recommendations on which living situation best suits your retirement plans and goals.

 

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Thomas O'Shaughnessy
Thomas O'Shaughnessy

Tommy O'Shaughnessy is the Head of Research at Clever Real Estate, the free online service that connects you with top local agents to save on commission. Tommy's team of data scientists create surveys, gather data, and analyze trends in housing, real estate, and personal finance. He directs public relations efforts, acting as a "data communicator" between his team and the press. Clever studies have been featured in Politico, the LA Times, CNBC, Forbes, Yahoo Finance, and other publications.

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