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Retirement Living: Renting vs. Homeownership

Owning gives you stability, but renting offers flexibility

<p>Courtneyk / Getty Images</p>

Courtneyk / Getty Images

Comparing Renting vs Owning a Home

In this video, you’ll learn everything you need to know about renting vs owning a home. Watch as we teach you the pros and cons of renting vs owning a home. See how renting a home can be beneficial and have drawbacks and vice versa. Learn about the investment involved in owning a home and the potential payoffs.
This video will help you determine if renting or owning a home is better for your current situation.

Reviewed by Ebony Howard

There are good reasons to own a home after retiring, but there are also plenty of arguments for renting. Renting can be less expensive as you skip the burdens of property taxes and maintenance costs. However, owning can be less stressful since you don’t have to worry about a landlord raising your rent.

Whichever route you go, housing costs will be one of your major monthly expenses in retirement. Here are some factors to consider when making a rent-versus-buy decision.

Key Takeaways

  • Housing costs will be a big part of your retirement budget whether you rent or own.
  • Owning offers stability and equity, among other perks.
  • Fluctuations in market value, unexpected maintenance expenses, and insurance deductibles can increase ownership costs.
  • Renting offers greater flexibility and liquidity, and you’ll spend less money (and time) on maintenance.

Tax Implications

In analyzing homeownership versus renting, one thing to consider is the tax implications.

Rental costs are not tax-deductible, so renters have no access to the tax break that homeowners get through the mortgage interest deduction. Nevertheless, the benefit of that deduction was greatly reduced by changes in the tax law that doubled the standard deduction while capping the mortgage interest deduction.

The interest on mortgages of $750,000 or less is deductible for a couple filing jointly. (If you bought your home before Dec. 16, 2017, you can still deduct interest on a $1-million-or-less mortgage under the previous law.)

Meanwhile, the property tax deduction is now capped at $10,000. Many homeowners are now better off skipping itemizing and going with the standard deduction.

Risks to Consider

In theory, buying a house after retirement gets you more for your money than renting. However, homeownership also entails substantial financial risks.

Issues such as fluctuations in market value, unexpected maintenance expenses, and the cost of insurance premiums and deductibles can increase costs over and above those of renting.

Whichever option you pick, don’t forget to plan for inflation—rent, property taxes, and insurance costs all go up over time.

Another issue is the maintenance risk associated with ownership. Renting is like buying an insurance policy against maintenance. Renters have no liability for regular maintenance costs, equipment failures, or catastrophes such as storms or floods. The landlord has to worry about those unexpected costs—as do homeowners.

An Investment Opportunity?

Real estate can be a great investment opportunity, but a residence shouldn’t be purchased for that reason alone. Housing is an unavoidable cost of living, and liquidating an investment asset shouldn’t involve finding another place to live.

“One of the biggest myths of homeownership is that it is an investment. It isn’t,” Kirk Chisholm, wealth manager and principal at Innovative Advisory Group in Lexington, MA, said. Chisholm adds:

Owning a home that you live in is an expense, not an investment. An investment is one that generates cash flow. Sure, there are some benefits of owning a home, but when you factor in the costs, tying up large amounts of capital, illiquidity of the home, and that house prices don’t always go up, it makes for a much less attractive “investment.”

To turn a home into an investment, a homeowner would have to buy low and sell high. Then you have to find another home. Unless you’re seriously downsizing, you take the risk of getting priced out of the market if prices continue to increase.

In some ways renting can be the economic equivalent of shorting a stock. If you believe housing prices are headed lower, you could rent a residence, wait for prices to fall, and buy a home later. Being wrong about the direction of housing prices and ending up paying a higher purchase price is similar to paying a higher price for a stock to cover a short position.

Cashing Out and Liquidity

Other financial benefits of being a tenant include freedom from worrying about housing market conditions and liquidity. Selling a home takes time and involves paperwork. Selling a home during a market downturn can yield disappointing returns.

Sidestepping these entanglements when it’s time to move can be worthwhile.

Some retirees live mostly or entirely on pension money—some combination of Social Security benefits, annuity payouts, or a government or union plan. Many don’t have large sums of liquid cash.

Without sufficient assets on the sidelines for unexpected expenses, the costs of owning a home could be ruinous.

Advantages of Owning

About 59% of homeowners enter retirement unencumbered by a mortgage, according to a 2023 Harvard Joint Center for Housing Studies survey.

That makes the question of renting vs. owning seem less complicated. Still, the fact that you have no house payment doesn’t make this a no-brainer. You’ll have to consider property taxes and maintenance costs. The older your home is, the higher those upkeep expenses could be.

Still, it’s easy to find arguments for staying—especially if you live in a house you own now and have no pressing reasons to leave it. Here are some key reasons to stay put.

Stability

If you own your home, you’ll enjoy more stability and control. You won’t have to worry about a landlord bumping up the rent. A landlord can’t sell the residence out from under you.

You still have the option to move, but it will be your decision—not a landlord’s. Also, you can’t remodel a rental, at least not without the owner’s permission.

Build Equity

For some retirees, it’s important to leave an inheritance. Others want to use accumulated home equity to take out a loan, line of credit, or reverse mortgage.

These are situations in which ownership makes the most sense. In areas where property values are increasing rapidly, owning gives you an asset that appreciates.

Tax Benefits

Although the 2017 tax overhaul reduced the benefit of deducting mortgage interest and property taxes, some tax benefits for homeowners still exist.

One substantial break is the state and local tax deduction.

Other deductions, including mortgage points, can help lower the amount you owe.

You get none of these tax perks if you rent.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD)

Emotions

The degree to which you’re emotionally tied to the idea of homeownership—or to the particular home where you currently live—is an important, nonfinancial consideration.

Pros

  • Equity

  • Stability

  • Tax deductions

Cons

  • Maintenance costs, time

  • Illiquidity

  • Property taxes

Advantages of Renting

Selling your home and moving into a rental has its points. If you currently rent, you know these benefits. But if you’re a homeowner contemplating jumping ship, here are some reasons to consider.

Open Options

Renting may make sense if you’re an empty nester, ready to downsize, or unsure where you’ll spend your retirement years. You may want to move away for better weather or a lower cost of living for some years, but also be easily able to move closer to your family later on.

Your health—or that of a family member—can be a factor if you believe you may need to move soon to receive or give care. Many assisted living, continuing care, or independent living communities are rent-only, leaving you with no choice if that’s where you’ll live.

If you do end up renting, a long-term lease will lessen the uncertainty of rising rents.

Fewer Costs

The decision to rent or buy is highly dependent on just where you plan to live. The relative costs of buying versus renting differ greatly among metro areas.

One way to determine which is cheaper is a measure called the “price-to-rent ratio,” which compares the cost of buying a home and the cost of renting a one-bedroom apartment for a year in a metropolitan area. The results for 2023, compiled by SoFi, are not all that startling: Renting is a bad deal in New York and Los Angeles. Renting is a much better deal in New Orleans and Chicago.

Less Maintenance

Most renters do not have to pay for major structural maintenance or even routine repairs.

One caveat: Read the lease carefully before you sign and make sure your landlord is responsible for all (or nearly all) maintenance and repairs, especially if you’re renting a house.

It’s not just the cost. One of the perks of renting is the option to forego climbing ladders and shoveling snow. A superintendent or a maintenance person can handle it.

Again, check the details before you sign a lease. Make sure your rental is well managed.

Freed-up Capital

Renting can free up money for other purposes, including investments. That keeps you liquid and can increase your overall income during your retirement years.

Investments often grow at a faster rate than real estate appreciates, making them a better use of your money.

If you are contemplating selling your home and renting, one other consideration is capital gains tax. The current tax law allows a capital gains exclusion of $250,000 for single tax filers and $500,000 for joint filers. You also will get to deduct expenses such as realtor commissions and many capital improvements you may have done to the home over the years.

For many, the exclusion and expense deductions may be enough to avoid paying any capital gains tax on the sale. For others, particularly in areas where homes are very expensive, those deductions may not be enough.

Pros

  • Liquidity

  • Little maintenance expense, responsibility

  • Flexibility in moving

  • Fewer costs, taxes

Cons

  • Unpredictable rent increases, eviction

  • No equity

  • No tax benefits

  • Inability to customize home

Are There Still Tax Benefits to Home Ownership?

More than 87% of taxpayers now take the standard deduction instead of itemizing expenses, according to the IRS. That pretty much says it all. The doubling of the standard tax deduction combined with the elimination of many tax deductions in 2018 has greatly reduced the number of people, homeowners or not, who save more by itemizing.

The mortgage interest deduction did not disappear but it has been capped at interest on mortgages of $750,000 or less for a couple filing jointly.

Home sellers may find it beneficial to itemize for the year in which they sell the home. Expenses of many upgrades made over the years can then be itemized.

How Many Retirees Sell Their Homes and Rent Elsewhere?

Only 17% of retirees sold their homes, or plan to, according to a survey published in 2024 by Fannie Mae. The vast majority decided to “age in place” for a variety of financial and emotional reasons.

Should I Consider Selling My Home and Moving to a Retirement Community?

One compelling reason to sell a home is the need to find a home tailor-made to your needs as you age. That may mean access to the social benefits of a community of like-minded people or easy access to healthcare. Or, it may just mean settling in a home that has home cleaning services and an elevator.

Options for retirement communities include independent living complexes, assisted living facilities, and hybrids that offer features of both. Both rental units and homeowner options are available.

The Bottom Line

For many people approaching retirement, the decision of whether to keep the family home or downsize to a smaller place is a difficult one. If you do decide to move, the stress and expense that can come with homeownership come into play. Whether to own or rent a home in retirement involves several considerations, such as:

  • What are the tax perks of renting vs. owning?
  • Is the home a potential investment opportunity or just another expense?
  • Which risks come with homeownership, in terms of unexpected costs, and can your budget withstand them?

Read the original article on Investopedia.

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