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A successful retirement requires thought and planning. This is especially true when it comes to housing costs, which can eat up a big chunk of your expenses. As such, you’ll need to determine whether it makes more sense to buy or rent in retirement.
Here are some factors you should consider, along with some of the advantages and drawbacks of renting vs. buying in retirement:
- Factors to consider
- Pros and cons of renting in retirement
- Pros and cons of buying in retirement
- How to decide between renting vs. buying in retirement
Factors to consider
Whether you decide to rent or buy, some retirees like the idea of downsizing. When you downsize, you usually see lower expenses — your mortgage payment, utility bill, and maintenance costs may all go down.
Additionally, it can be a way to simplify your lifestyle, allowing you to get rid of some of the items you don’t use any more.
If you’re interested in downsizing in retirement — perhaps you want to buy a condo or rent out a smaller home for the time being — there are some important factors to consider.
Your timeframe for retiring
If you’re planning to retire soon and are happy with your current location, purchasing a home or condo could be a good option.
But buying, even if it’s a smaller place, comes with upfront costs and less flexibility should you want to move again. If you do buy, plan to stay in your home for the long run — at least five to seven years or longer — to recoup those purchasing costs. Otherwise, it might make more sense to rent.
Your current home equity
If you already own a home and plan to downsize, how much equity you have can make a big difference. You might be able to put down a larger down payment — or even pay for the new place outright — with the equity from your current home.
On the other hand, if you don’t have a lot of home equity, you might benefit more by renting out an apartment and investing your equity instead. Consult with a financial advisor if you’re unsure of the best route to take.
Your goals for retirement
The goals you have for retirement can also impact whether you rent or buy. If you want to live near your family, and they live in a place where it’s expensive to purchase property, renting becomes the obvious choice.
However, if you want to be able to make changes to your home and amass equity — and you don’t plan to move anytime soon, if ever again — buying might be the better option.
Your liquidity needs
Once you buy, your home locks up a good chunk of your net worth. While you might have stability in terms of a place to live, tapping into your equity if you need the money later can be difficult — and you might have to pay closing costs should you take out a home equity loan or do a cash-out refinance.
Keeping your money liquid in an investment account while you rent might be a more savvy financial move and can help you cover unexpected expenses. But if you want to leave an inheritance, building that equity over time can also provide your heirs with a valuable asset.
Pros and cons of renting in retirement
By renting in retirement, you can benefit from a lack of maintenance costs, high mobility, and greater liquidity in your assets. But there are important drawbacks to consider as well.
| Pros | Cons |
|---|---|
| No maintenance or repair costs | Rising rent costs |
| High mobility | Landlord could sell and force you to move |
| Greater liquidity in assets | No flexibility to change living space |
Pros
- No maintenance or repair costs: When you rent, you don’t have to pay maintenance costs, since you aren’t responsible for the upkeep of the property. Same goes for repair costs. If something breaks or gets damaged, your landlord takes care of it.
- High mobility: If you decide to move to a different area, you don’t have to worry about the housing market or the time it takes to sell your house. You can move when you’re ready.
- Greater liquidity in your assets: Your home can lock up a portion of your net worth when you buy. If you need extra cash, you’ll have to jump through hoops to access the equity in your home. When you rent, you can keep all that money in more liquid accounts.
Cons
- Rising rent costs: When you rent, your monthly payment could rise each year. Your landlord has the right to increase rent in accordance with market conditions.
- You could be forced to move: If your landlord decides to sell the property, you might have to move. Other reasons your lease might not be renewed include your landlord wanting a different tenant or you violating some terms of the lease.
- Less flexibility with your living space: There are restrictions on what you can do with a rental property in terms of modifying the space. You can’t customize your living area by knocking down walls, painting rooms, or building additions. In some cases, you might not even be able to replace appliances without permission from your landlord.
Pros and cons of buying in retirement
With homeownership, you get to enjoy certain tax benefits, as well as the possibility of building equity and the relative stability of housing costs. On the other hand, though, you have less liquidity and are more tied down to your location.
| Pros | Cons |
|---|---|
| Potential tax benefits | Less liquidity |
| Build equity | Timeframe for selling |
| Stability in housing costs | Potential losses due to market conditions |
Pros
- Potential tax benefits: If you itemize your tax deductions, you can usually claim a deduction for mortgage interest and points. You might also be able to claim a property tax deduction.
- Stability in housing costs: With a fixed-rate mortgage, you don’t have to worry about rising mortgage costs; your monthly payment will be the same throughout the life of the loan. This provides a little more stability in your housing costs, even though your taxes might go up and you may have to pay for an unexpected repair or two.
- Build equity: When you own a home, you have the potential to build equity over time. You can access that equity later (through a reverse mortgage, for instance) or let it keep building in value so that you can leave it for your heirs.
Another way to utilize your home equity is through a cash-out refinance. Credible can help you get started with your cash-out refinance. In just a few minutes, you can compare our partner lenders and see prequalified rates on a variety of different home loans.
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Cons
- Less liquidity: While you might be able to tap your equity later, it can be sometimes difficult to access that value. You might have to wait days, weeks, or even months to receive funds, which can be a problem if you need money fast.
- It can take longer to sell: You won’t have the same kind of flexibility as a renter. Selling your home can take time. If you want (or need) to move quickly, that might not be possible.
- Potential real estate market losses: If you’re forced to sell when the market is down, you could wind up with a major financial loss.
How to decide between renting vs. buying in retirement
Deciding whether to rent or buy in retirement can be a tough choice. Consider your retirement dreams and financial situation — and keep the following in mind — before making a final decision:
- You want more stability in your housing costs
- You hope to build equity to tap later or pass on to heirs
- You know you’ll be in the same place for a significant period of time
- You know you can afford property tax and insurance costs
When to rent:
- You want to avoid the cost and responsibility of maintenance and repairs
- You want more liquidity
- You’re not concerned about passing a house down to your heirs
- You want flexibility in being able to move, or you aren’t planning on staying in the same place for very long
