Friday, July 03, 2009

Owning versus Renting a Home during Retirement

I've always planned on owning a home during retirement, with the mortgage paid off. Home ownership without a mortgage seemed to be a financially prudent plan in retirement. However, I am starting to reconsider home ownership in retirement, since it may significantly reduce our flexibility, e.g. ease of transferring to a new location.

Recently, I met a private boarding school teacher, whose housing is provided as part of employment. Besides the benefits of not paying for maintenance, and avoiding the crash of housing prices, his family has the flexibility to move without the burden of selling their current home. As a result, his family is already considering plans for future international residences after their youngest graduates from high school.

My conversation with the teacher inspired some thoughts on not owning a house in retirement. The main benefit is the flexibility to live where ever we would like, without having to sell our current home. Thus, we could easily choose to live close to our adult children, where ever they might go to school or work in the future.

Some might argue that renting would expose us to rising rent costs, especially if there is higher inflation. However, having our mortgage paid off does not eliminate housing costs. We still have property taxes, repairs, and maintenance costs which can be quite high, being 15 to 20% of our annual budget. And these costs also rise with time.

Since our daughter is still in pre-school, we'll keep the house at least until she graduates from high school. For now, we like the stability of living in the same neighborhood and same school district until she is ready for college.

However, once she is in college, there will be less reason for us stay in our current home. At that time, it may be beneficial to sell our home, both for financial and lifestyle reasons.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial, home ownership, or retirement advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC


Brad Castro said...

Interesting idea, but in the end, I think it's flawed.

Even with maintenance, taxes, insurance, etc., owning a home that's paid off is going to be a lot less expensive than renting a home, condo, town home, apartment, etc.

And when you rent, you do still pay maintenance, taxes, insurance etc. - it's just that it's your landlord's and not yours.

Renting is just so inefficient from a net worth perspective. It's like heating a home in the winter or cooling one in the summer but always leaving your front door open. The money just flows away.

We have insurance and taxes rolled together with our mortgage payment and now, for the first time, we've finally reached the point where fully one-half of our monthly payment is directly applied to the principal. That's a tremendous feeling with great long term benefits.

You can still be flexible with your living arrangements even if you're a home owner. Moving is a pain whether you own or rent - and there's nothing to prevent you from buying and selling a different home every couple of years. That may not be terribly efficient in itself, but it's still hugely advantageous over renting.

Best wishes as always -

TimH said...

I'm not sure I would totally agree with Brad -- buying and selling houses also is dependent on the local market where the house is. You could easily sell a house in a down market in one area, and buy in an up market in another. My parents did that when they were following my dad's jobs. They would have been totally better off renting, and only buying when they had decided their final retirement town.

I was thinking you could also do both. Who says that you have to sell your house to live elsewhere. You could become temporary landlords, rent, rent, rent, and then kick out the tenants and live in your old home.

Lots of options -- and there are several rent vs. buy calculators on the web that show you the difference dollar wise when you choose one over the other. BUT, that doesn't beat the freedom of renting, moving, renting, moving, renting moving. It's all dependent on the lifestyle you wish to keep.

Good luck.

S. B. said...

I doubt there is an easy answer to the rent vs own issue for you. It is true that maintenance and property tax costs are significant, and many people do not fully understand that fact until they have been a homeowner for a long time. Nonetheless, over long periods of time, the average cost of ownership is usually considerably less than the comparable cost of renting. I've been reading this blog long enough to be confident that Super Saver understands all of that.

What I think the author is pondering is not the costs, but the risk side of the comparison. But even then, I'm not sure there is a clear winner because there are different kinds of risk. Renting exposes you to more inflation risk and also to the risk that you might be forced to move due to some event related to the landlord. Owning exposes you more to the risk of liquidity, to the risk that the house could fall in value, and to the risk that significatnt maintenance expenses may not be predictable, both in their timing and in their cost.

Personally, I'm going with the ownership route, but the choice does not appear overwhelmingly lopsided to me. For others who may have different assumptions about different kinds of risks or who may be contemplating doing different things with their lives, I could definitely see how the rent option might be better for them.

Super Saver said...

@ Brad, Tim and SB,

Thanks for your thoughtful comments and discussion. You all have brought up some very good points.

I agree that owning is better than renting from a networth/wealth building perspective, especially if both homes are of equivalent value. With the exception of the first two years out of college and an overseas assignment, I have always owned my home.

On the other hand, I also agree that renting provides more flexibility and networth liquidity than does owning. Although one could buy, move and repeat, I think such action might cause a decline in networth after real estate commissions, especially in current markets. Also, even if home equity is substantial, it isn't easy to spend one's house.

For us, I believe the phase of life affects which has higher priority: networth building, or flexibility and liquidity. Thus, while we were building networth, owning made sense, i.e. prior to retirement and at the start of retirement. However,as we spend (i.e. reduce) our networth in the later phases of retirement, I expect that flexibility and liquidity will be higher priority, making renting a more likely option.

Bret said...

I agree with one point Tim made, that you could keep your house and rent it out.

That way, you mitigate housing inflation by paying and collecting rent to offset each other. Plus, if you don't like where you end up, ou can always move back into your house. Or, if you need some money, you can sell or borrow against your house.

I know a number of couples who have retired and moved away from So. Cal. Then, they grow to hate the new place and can't afford to move back. I'm not sure where you are from, but it's a big problem for people from here.