Monday, March 16, 2015

Making the Move: Should You Rent or Buy?

As older adults decide it’s time to move, one big issue is whether to rent or buy the next place they live. The financial issues are complex, but other questions are important, such as whether you still want to be responsible for home maintenance or rather spend your time traveling.


As older adults decide it’s time to move, whether to downsize or to be someplace warmer or nearer their children or grandchildren, one big issue is whether to rent or buy the next place they live. The financial issues are complex, having to do with mortgages, taxes and your financial situation. But there are also practical and emotional issues, such as whether you want the maintenance-free life of renting an apartment. One couple opted for renting, even though owning a home may have made more financial sense (from Senior Forums):

“My husband and I owned a house when we were raising kids. When the kids started to leave home (although I loved that house), we realized that the house is aging and would soon need major renovations. We also realized that our kids really did leave home with no intentions of moving back in, so it was time to downsize. We now love our small but cozy apartment, and we don't have to worry about repair work. We are fortunate to have moved into a nice place where if we phoned the office for any repair work, such as even replacing a ceiling light bulb, the next day, the repair work is completed. Could we save by buying a house? — possibly, but the stress of maintaining the yard work and the repair work is just not worth it for us.” 

Today’s Market

In today’s market, buying a home generally makes more financial sense than renting. But there’s a big “if” for seniors, who may not plan on living in the home long enough to make up for the initial purchase costs. There are several other “ifs.”

A study by the real estate website Trulia concluded that buying a home would be cheaper than renting in the top 100 U.S. metropolitan markets if you take out a fixed, 30-year, 3.5 percent mortgage and stay in the home for at least seven years. Its calculations included the initial total monthly costs of owning and renting, including maintenance, insurance and taxes.

One advantage in the homebuyer’s favor is low mortgage rates, while rents are currently high. In many cities young people are opting to rent for a longer time before buying a house, putting upward pressure on rental units. Of course, any calculations about whether it’s less expensive to rent or buy must consider the housing situation where you want to live. While housing prices on average have risen across the country, there’s no guarantee that the trend will continue or that it will be true for your region. On the other hand, getting a fixed-rate mortgage will lock in your payments, while rents will likely continue to rise.

If you stay on your new mortgage for less than the seven years— the basis of the Trulia study’s calculations— you’ll see less of an advantage, due in part to the upfront costs of purchasing a home, like closing and moving costs. One financial planner says retirees generally shouldn’t buy homes unless they intend to live in them for at least five to 10 years. Besides the initial costs, you need enough time to recoup your investment if housing prices stagnate, although it will depend on whether the local market is appreciating.

A Good Investment?
When you’re figuring out whether to buy or rent a place in retirement, much depends on your personal financial situation. Do you need to free up money to invest? Will you make a profit if you sell your house, and how much? How much money do you have in savings?

If you make a good profit on your house and don’t buy another house of equal value, you’ll have money to invest. If your investments turn a profit, you could come out ahead by renting rather than buying. According to Vanguard, a portfolio made up of 50 percent stocks and 50 percent bonds delivered an average annual return of 8.3 percent from 1926 to 2012 (Forbes). Of course, there’s no guarantee that those figures will hold steady in the future.

Another issue that could impact your general financial situation is the down payment required for a mortgage. If you sold your house at profit this is not a serious issue, but can be if you have to take money from your retirement accounts. Withdrawing money from a retirement plan also means you’ll lose the future tax deferral and might owe taxes (maybe even a tax penalty) when you take out the cash.

Costs of Home Ownership
Owning a home has several ongoing costs that can be calculated. They include insurance, property taxes and mortgage interest. Monthly rental costs can include the rent, utilities, parking fees, security deposits and rental insurance. Trulia has a rent vs. buy calculator that will let you plug in your own numbers to see which way the balance would tip in your case. AARP also offers a calculator that helps you weed through the fees, taxes and monthly payments to help you with the decision.

Other costs that are not as easy to budget are maintenance costs, such as replacing refrigerators or dealing with plumbing or electrical issues, which are usually paid for by the landlord when renting. For seniors on a fixed income, major repairs, such as fixing the hot-water heater, can take a big chunk out of a monthly budget.

Even smaller maintenance issues, like cleaning out the gutters or shoveling snow from driveways and walkways, can cost money if you can no longer do it yourself. Before deciding to buy another house, you might list all the small repairs you do around the house and yard and calculate how much you would have to pay a handyman to do those things. One alternative to buying a house is to instead acquire a condo or townhouse with a homeowners association (HOA), whose fees cover such things as trash, water, snow removal and exterior maintenance, although interior repairs are still paid by the homeowner.

Beyond the Financial Issues
Just as important as financial concerns are quality-of-life issues, like wanting to be close to your family or getting rid of the responsibility of yard maintenance. One couple weighed the financial and emotional issues before deciding they wanted to rent (from Senior Forums): “My husband and I (73/67) are . . . looking to relocate closer to our kids in CA. We've lived there before so we know it's not the cheapest place to live . . . especially for seniors, but that's where our family is. We've debated back and forth about buying vs. renting, too. Money-wise, at this stage in our lives, renting would be a better option for us. Our home here in PA has a lot of stairs and it's not getting any easier to go up and down them every day. My husband had a severe accident a couple years ago when he fell from a 10' ladder and shattered his left ankle. . . . He enjoyed yard and lawn work and could get up on ladders to paint trim and trim trees, but not now. It's taken a toll on both of us. We also live in a snow-belt, and this last winter was a clincher for us that we need to be in a warmer, drier climate. His ankle is loaded with arthritis and the dampness here is uncomfortable for him. This is not the quality of life we want for our final years.”

Renting also provides the freedom to take long vacations and not worry that snow is piling up in your driveway or if the pipes have frozen. Older adults who are single, especially women, might feel safer in an apartment complex rather than in detached homes.

On the other hand, renting can bring its own source of insecurity if the landlord fails to renew your lease or the rents go up. Having a fixed mortgage may be preferable to the risk of having to move someplace else if the rental situation is no longer a good one.

For pet owners, having your own home (and yard) means you don’t have to find an apartment complex that allows pets, especially dogs. A house also provides a yard for the pet as well as a place for those who love gardening.

Some older adults might want to keep their bigger homes because they offer a place for children and grandchildren to visit. Staying in a neighborhood where you have friends and memories also can be important. As a homeowner, you have more maintenance and repairs to worry about, but you also have the ability to change your environment through renovation.

Sources

Senior Forums
“Rent vs. Buy? For Seniors, It’s Rent vs. Own,” Nov. 13, 2014, Senior Housing
“Senior Finances: Buy or Rent?“ Jan. 30, 2011, Senior Citizen Journal
“Should You Rent Or Buy A Home In Retirement?” May 31, 2013, Forbes
“Renting Vs. Buying for Senior Citizens,” Ehow
“Should You Rent or Own in Retirement?” Oct. 31, 2012, AARP


Making the Move: Should You Rent or Buy? was featured in the March 2015 Senior Spirit Newsletter. 

Blog posting provided by Society of Certified Senior Advisors
www.csa.us