Buying versus renting. Which is better in retirement?
This is a difficult question to answer in broad terms because everyone’s situation is unique, and not only are there numerous variables, but for many people, there’s an undeniable emotional appeal to having your own place to call home.
But before we get too specific, let’s review some general pros and cons of each.
Some advantages of owning:
- It’s easier to get credit in an emergency.
- Fixed mortgages mean a steady monthly payment with no increases.
- Paying a monthly mortgage payment is essentially a “forced savings” plan.
Some disadvantages of owning:
- The risk of a housing crash.
- The cost of upkeep and emergencies.
- Property taxes and insurance costs that will never go away.
Some upsides of renting:
- Lots of flexibility.
- Your total monthly housing expense is merely the amount of your rent.
- In mid-range and high-priced cities, it’s typically much less expensive.
Some downsides of renting:
- Periodic rent increases.
- Difficult landlords with no motivation to fix anything.
- No equity.
Costs and Other Considerations
The next thing to consider is the price of housing. This largely depends on two key factors: Where you want to live (because housing prices vary wildly by city and region), and how much after-tax money you’ll have available to spend on housing (which is also partly based on each region’s respective state and property tax rates).
First, where do you want to live? For an idea of how disparate prices are:
- According to Zillow, as of September 30, 2018, the median home value in the Cincinnati metro area is $164,500.
- The median monthly rent for the Cincinnati metro area is $1,295 a month.
- According to Zillow, the median home value in Naples, Florida, is $325,200.
- The median rental price for a home in Naples is $3,900 a month.
Next, let’s say you’ve done your homework, and you’re considering moving to an as-yet-to-be-determined town in any one of three states that you particularly like.
Let’s also say that the intangibles of those states, such as the weather, beauty, services, shopping, culture, recreation, and close proximity to family (or whatever “quality of life” components are most important to you), are all equally desirable.
You’ll want to consider the following questions before you decide between renting and buying since owning a home is simply more financially complex than renting:
- What are the state’s property taxes?
- What are the state’s income tax rates?
- How do the rents and home prices compare in all three locations?
- And, if you really want to get granular, what are the local sales taxes for each location?
Just by comparing the answers to the questions above, you may already be able to eliminate one or more of your potential locations. And, best of all, once you’ve done the research, you may be fortunate enough to fall in love with a house located in a town where not only are home prices affordable but in a state that just happens to have both zero (or low) income tax and reasonable property tax rates.
Once you figure out where you want to live, then, based on how the local taxes and costs will impact you, and, based on your house price point, you can calculate your after-tax income and decide which option is best.
There are, obviously, other important questions you’ll want to ask yourself (and your advisor). For instance, can you easily afford the cost of repairs, insurance and upkeep on a fixed retirement income?
The Simply Money Point
To make the best decision for you, you’ll want to:
- Make a list of your personal pros and cons for buying.
- Make a list of your pros and cons for renting.
- Identify a few places you want to live.
- Price home values and local rents.
- Figure out your after-tax income (based on both the state income and property taxes).
- Figure out what you can afford.
If you can afford to buy a house and still have plenty of money left over for emergencies while still achieving 100% of your pre-retirement income, it might make the most sense to buy.
However, if keeping costs low and cash flow high are your primary considerations during retirement, then renting in your preferred area is not only going to be cheaper month-to-month, it may well be the best decision for you.