The big decision when you retire: Should you rent or buy?
Robyn Mancell sold her Southern California, four bedroom home four years ago when her youngest child left. She moved to a cheaper, one bedroom apartment nearby. "There was a lot of upkeep," the 58-year-old said of her former place. As some empty nesters and retirees decide to downsize, giving up a mortgage for a rental may be attractive, depending on where they live and their other income streams, financial and real estate experts say. About half of seniors surveyed by Credit Sesame, a credit and loan management site, said affordability is the top reason they aren't buying homes. Retirees 65 and over in markets like Providence, Rhode Island, Kahului and Honolulu, Hawaii, Lancaster, Pennsylvania, New Haven, Springfield, Massachussetts and Reno rent at a rate 1.2 times more than the national average, according to data compiled by realtor.com. On the other hand, retirees own at 1.1 times the national average in markets like The Villages, Punta Gorda, Sarasota and Vero Beach, Florida, Prescott, Arizona, and Santa Fe, despite it being also cheaper to rent there, according to the realtor.com data.
A good time to transition to becoming a tenant may be when you move your retirement accounts from growth funds to safer, income generating funds, often around age 65, said William Flood, a real estate investor analyst with FitSmallBusiness.com. "That's when buildup of real estate equity is no longer as much of a concern as how monthly carrying costs fit into a fixed budget," he said. Before signing a lease, however, consider the following: Tenants still have responsibilities "When people are tenants they think the landlord is going to take care of everything," said Jason Shepherd, co-founder of Denver-based Atlas Real Estate Group. Yet things like plowing the driveway, mowing the lawn and changing light bulbs still may be the tenant's responsibility. Owners can control housing costs Being a tenant can offer less stability if the owner decides to sell the property or boosts the rent every year, Shepherd said. When Mancell began renting her apartment, she was spending about $600 less on rent than her mortgage. But she was also subject to 10 percent annual rent increases that eventually caught up to the mortgage. A fixed mortgage payment can be a hedge against inflation, said Alexis Hongamen, founder of FederalRetirementAdvice.com. Consider the value of home equity In areas that are appreciating steadily, it may be advisable to buy. "It generally means that the neighborhood is increasing in popularity and quality, which means rents will eventually rise [also]," said Allen Shayanfekr, cofounder and CEO of Sharestates, a real estate investment company. Shepherd said the ability to tap your equity in a home later in life can be valuable. But be aware it could take months to sell or many weeks to refinance and tap those funds, Hongamen said. Owning outright may stretch your dollar further The tax benefits of a mortgage, insurance and property tax write-off may not be as valuable, particularly if the home is owned free and clear or has a low mortgage balance, said Flood. (And tax-reform being debated in Congress could change that.) Selling a debt-free home and using the proceeds to pay rent also doesn't make financial sense, said Michael Alexenko, a certified financial advisor and president with St. Charles, Illinois-based Royal Asset Managers. Assuming you netted $250,000 from a home sale, you should draw about $10,000 a year (based on a 4 percent withdrawal), which may not let you to rent a home comparable to the old one, Alexenko said. Think about renting locally and investing remotely If retirees are located in a major housing market where monthly mortgage payments exceed median area rent and are in a position to invest, they should consider renting a home locally and buying another somewhere else to rent out, said Steve Hovland of HomeUnion, a real estate investment planning company. "The mortgage on an investment property will likely be cheaper than their monthly rental payments," Hovland said. Consider your lifestyle For some, the psychological benefit of owning and the ability to decorate and change the premises is important, said Hongamen. Others want to move around. Four in 10 older Americans rent because it gives them more flexibility, according to the Credit Sesame survey. Mancell, who co-owns an online trading business called Girls Gone Forex, is one of them. She is planning to join a network of live-work, short-term housing for $500 a week so she can see the world. "Saving money wasn't really the point. I just want to be free," she said. "I don't know if I'll ever buy a house."
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