Buy or rent after retirement? 6 things to keep in mind

rentvsbuy

After retirement many people think about relocating or downsizing, both to save costs and for a change of scenery. With no job to go to anymore, many look forward to ditching the snow and cold for the sun and beach. Moving to a neighborhood or state with lower taxes and living costs certainly can help your retirement dollars go farther. When you’re moving to a new home as a retiree, should you buy or rent? Increasing numbers of seniors are choosing to rent. Here are some things to factor into your decision.

1. Owning a home is often more expensive. Owning a home involves many costs. Besides the purchase price and closing costs, there are costs of ownership including property taxes, insurance, maintenance, and homeowners association fees. These costs vary widely depending on where you live and which companies you do business with, but we can try a simple example.

Assume you plan to purchase a home for $100,000. Here are some typical costs.

Closing costs: closing costs are typically 2% to 5% of the purchase price. We’ll assume 3%, or $3,000.

Homeowners insurance: the average homeowners insurance premium in the U.S. in 2012, which is when the most recent complete annual data are available, was $1,034. This represented a 5.7% increase over 2011. If the premium increased at the same rate in each of the next four years, the current average premium is estimated at $1,291.

Property taxes: property tax rates vary by state. In Alabama it’s 0.43% while in Texas it’s 1.9%. We’ll assume 1%, or $1,000 per year.

Maintenance: Maintenance is estimated to be at least 1% of a home’s value. We’ll add a bit more and estimate $1,500 per year.

So adding up these items, the total costs of ownership are $6,791 per year.

Adding in the $100,000 purchase price, if you own the house for a 20 year retirement, your total cost is $235,820.

By comparison, the cost of renting consists of the monthly rent plus renters insurance.

The average cost of renters insurance is $144 per year, assuming $30,000 of property coverage and $100,000 of liability coverage. Over 20 years, that’s $2,880.

So if you can rent a place that costs less than $11,647 per year, or $970 per month, you come out ahead by renting in this example.

Of course, the reality is a little more complicated. This example doesn’t take into account appreciation in the home’s value, inflationary increases in rent, taxes, and insurance, and mortgage interest and deductions. It also doesn’t consider any profits you would forego by purchasing the home instead of putting the $100,000 in other investments.

If you want a more detailed calculation that considers your specific situation, there are online rent vs buy calculators available such as this one from the New York Times.

2. Renting gives you more flexibility. By renting, you are not tied down to one location and can move when your lease is up. Selling a home on the other hand can take months or even years. If you’re thinking of retiring in another part of the country, renting first gives you the option to move back if you decide the new location isn’t what you thought it would be.

This flexibility works both ways, however. If you’re renting and the owner decides not to renew your lease, you may find yourself looking for a new home unexpectedly.

3. With renting, you’re not responsible for upkeep and repairs. The owner takes care of mowing the lawn, painting the deck, and planting the flowers. As people grow older, many are less inclined to take care of these tasks. Outsourcing regular upkeep adds to the maintenance cost of home ownership.

4. Renting makes your expenses more predictable. The monthly rent and insurance are the only housing expenses you normally have as a renter. As a homeowner, you can never be sure when a repair bill will come up, a leaky pipe, or damage to your roof.

5. As a renter, you forego any price appreciation. Depending on which state and even which neighborhood you live in, your home could appreciate in value during the 20 years you’re living there.

6. As a homeowner, your home is your castle. You’re not subject to the restrictions imposed by the owner regarding how you can decorate the interior and where and when you can plant flowers. You can even make modifications to the home to suit your needs and lifestyle. In the end, like many people you may choose to buy because these immeasurable benefits of home ownership are valuable to you.

 

 

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