If you’re facing this tough decision, read on. It can be a costly mistake if you make the wrong choice.

by Andrea Norris-McKnight

So how do you decide if home ownership or renting will make more sense for you in retirement?

To help out with tips on making this decision, we reached out to Elizabeth Colgrove, editor of the blog The Reluctant Landlord. Here’s what she had to say:

Q: When is the best time to consider a housing decision in retirement? Before or after?

Elizabeth: The easy answer is you should always map out your plan before a big decision. While this might seem a bit premature, the husband and I have already started to think about this question.

The harder decision that you are going to have to make is should you go further than consider and actually buy your retirement house before you enter retirement. My husband and I plan on buying a retirement house and then renting it out as a vacation rental when we travel around in our sailboat. Here are a few questions you should ponder to see if it makes sense for you.

• Are you going to be relocating to a different area?
• Do you know where you want to live exactly
• Do you have a large salary position?
• Are you paying cash or putting down a large payment or do you want to put as little down as possible?
• Are you willing to tie your assets up?
• Are you going to selling your current house to fund your next house?

Q: When is renting in retirement a good decision? What are the pros and cons to doing this?

Elizabeth: Owning a home is not going to always make sense financially. You should always evaluate if renting or buying is cheaper. Here is the comparison of pros versus cons when trying to decide what would work best for you.

Pros

• Cheaper – Renting almost always makes sense if rent is cheaper than owning. There are some parts of the country where you can rent for cheaper than your mortgage.
• Flexibility – Renting is quicker to end if you wish to move on.
• Less funds tied up – The only funds you tie up is your security deposit.

Cons

• Your landlord can decide at any time to not renew the lease or raise it. There is no security either in price increase or property.
• In a mortgage with a fixed rate, the only things that could increase are taxes and insurance. With rent, the entire thing can increase. You also don’t get any appreciation.

Related: 6 Things To Consider Before Downsizing to the Rental Market for Retirement

Q: When might buying a home in retirement be the best move? And what are the pros/cons to doing this?

Elizabeth: We plan on buying a retirement home sooner rather than later with the goal of having a placeholder in the market. This will have someone else paying off our mortgage, building equity, and a long term home for us. While this isn’t for everyone, it’s our goal.

Pros

• Cheaper – While the market does peak and crash over time, the market does increase. We buy houses for the long run, so for us, this works best. The best part is even if we don’t want to live there, we can rent it out.
• Security – We own the house. Other than the bank or county repossessing the house because we don’t pay, no one can kick us out of the house. There is security in knowing that it is your home and it does not change.
• Fixed Prices – The price is fixed minus taxes and insurance. This means that if the area gets popular, our rent won’t double, forcing us out since we can’t afford the area any longer. Yes, the house value can double, but other than the taxes and the insurance increasing, the principle balance of my mortgage does not.
• Control over updates/improvements – It is our home, so we can age in place. If we need to add a ramp or other improvements that might detract from future value, the landlord can’t say no because we are the owner.

Cons

• No Flexibility – Your assets are tied up in a home. Real estate is not liquid. It is upwards of 10% in cost to sell the asset.
• Repair Costs – Owning a house means large systems (A/C, heating, roof, siding, etc.) that may need replacement. These can be in the thousands of dollars, which is expensive on a fixed income.
• Tied Up Assets – Depending on the market and other earning power, your real estate could be a negative, not a positive, preventing growth.

Q: When planning for living arrangements during retirement, what are some other options beside renting or buying a home?

Elizabeth: My husband and I dream of sailing around the world. While we definitely plan on having a home, we really want to explore the world living off our cash flow. There are lots of ways to live besides just owning a home.

For instance with a motor home, you can live in a home and travel around to different cities. Or with vacation homes, you can buy multiple homes and then live in it during one time of year and rent it out during the other times of year.

There are lots of options. The key is to do what you love and want to do and to have the financial freedom to live your life the way you want to live it.

Expert Interview: Where Will You Live When You Retire?

Q: Are there ever things that people forget to plan for or think about when they are preparing for downsizing their housing during retirement?

Elizabeth: There are a lot of things one needs to think about beyond financial, tax, and legal ramifications. Here are four other things one should think about.

• Updates/Improvements – What long term improvements or updates does your home require that could need a substantial fund?
• Actual Value of the House – Everyone has an idea of what their asset is worth. The key is to know the actual value. This will allow you to make accurate financial decisions. I personally am a fan of asking a real estate agent for a market comparative.
• Tax Planning (Capital Gain Costs) – It is very important to have an idea of the tax costs when you sell your house. Therefore, keep in mind a financial plan of what you wish to do with the asset later.
• Effect of a Mortgage or Lack of One – It is going to be much harder to get a mortgage in retirement without the income. So make sure if you want a mortgage, you have one prior to quitting.

Hopefully these tips will help as you consider your own retirement housing needs.

• Comparing Retirement Housing Options: A Guide
• When and How To Downsize Successfully
• Considerations Before Moving Into a Retirement Community
• Financial Benefits of Living in a Mobile or Manufactured Home

Reviewed August 2024