Headline Name: Email: subscribed: 0 We respect your privacy Email Marketingby GetResponse

Are Retirees Better Off Renting than Owning a Home?

If you’ve spent much time on this site, you know that I’ve taken aim at the assumption that homeownership is good for everyone. It’s not that I think owning a home is bad, but more that I don’t think it’s right for everyone. In addition, I think that the advancement of- and unquestioned belief in- universal homeownership was one of the root causes of the real estate and mortgage meltdown.

Today I’d like to zero in on homeownership as it relates to retirees, and by extension, to retirement planning. I’m going to risk committing a heresy to make the case that many would be better off renting in retirement.

Why might some retirees be better off renting?

Carrying a mortgage into retirement

Are Retirees Better Off Renting than Owning a Home?

Are Retirees Better Off Renting than Owning a Home?

The conventional wisdom is that you should have a home of your own and no mortgage on it when you retire–so far, so good. But what if your house won’t be paid off before retirement? Or what if you’re already retired and you still have a mortgage?

For many people, that’s the reality. More than half of retirees were carrying mortgage debt in 2009, which was double the percentage just two years earlier. Apparently a generation raised with debt as a traveling companion doesn’t feel compelled to eliminate it in retirement as previous waves of retirees have.

For the vast majority of people, being able to retire at all will require a reduction in living expenses; since a mortgage is typically the single largest expense, carrying it into retirement will be like dragging an anchor from the past.

It begs the question: what’s the difference between paying a mortgage, and paying rent? I’d argue that the answer is “not much”. When you’re a tenant, you pay rent that enables you to live in the property. When you pay a mortgage, you pay “rent”—a.k.a., interest—on the money you owe that enables you to live in the property.

So if it’s a wash whether you rent or own with a mortgage, why not own? Read on.

The tax benefits of home ownership may evaporate

Tax breaks are one of the major reasons driving people to own homes, but for many seniors that benefit diminishes or even disappears completely. Since the income tax is progressive (tax rates rise with higher income) the homeowner benefit declines with the lower income that retirement usually brings.

Not only is income usually lower, but some of it also escapes taxation altogether. Social Security income, for example, is only partially taxable for federal taxes while states exempt it completely. And most states offer generous income exclusions for retirees. Here in Georgia, seniors get a $35,000 exemption for “other retirement income”—and that’s per person.

Lower income/less taxable income means less homeownership tax benefit. For many retirees, there will be no more tax benefit to owning than with renting.

A renter doesn’t have to worry about repairs and maintenance

If you rent, you don’t have to make repairs. New roof–$5000, $7000, $10,000—not your problem. New furnace—$5000, $7000, $10,000—again, not your problem. These expenses, often completely ignored in the homeownership equation, can be a budget buster for retirees on a fixed income.

And how about maintenance? Maintaining the lawn, trimming hedges, raking leaves, shoveling snow—the homeowner has all of these responsibilities, the renter has none. For the retiree, or the person planning for retirement, these are more than just minor ongoing responsibilities.

Who will maintain your property if you’re unable to? Many retirees like to travel; and as much as we may not want to think about this, many have or will develop health issues that will make routine maintenance undesirable or even impossible. Now you’re looking at paying someone else to do what you can’t, and another expense is added to the budget. A retiree who rents doesn’t have this issue.

Even if you have no mortgage, you’re never really “rent free”

It’s sometimes said that people who have paid off their homes live “rent free”, but as popular as that notion may be, is it even true?

Not entirely – and maybe not at all.

We’ve already discussed repairs and maintenance as an ongoing cost of owning a home, but you’ll also have real estate taxes, homeowners insurance and possibly home owner’s association dues. In some areas of the country, real estate taxes have gotten so high that the monthly expense comes close to what it would cost to rent an apartment. None of these expenses will disappear because you paid off your mortgage.

The idea that you’ll ever truly be rent free is virtually a myth, and we haven’t even gotten to another significant “expense” involved in homeownership that rarely gets much attention…

Opportunity cost

A house is a capital trap, and one that’s owned free and clear has even more money tied up in it. While not having a mortgage payment is a substantial advantage to a retiree, much of the benefit is lost when we consider what else could be done with the money if it weren’t tied up in the house, also known as the opportunity cost.

Earning income on the money to generate an additional cash flow is one opportunity cost. This is a more obvious issue when interest rates are higher than they are now. Since interest rates on savings vehicles are at historic lows, it doesn’t seem to be much of a factor. But low interest rates have caused a real issue for retirees in this regard, creating a very real opportunity cost from another direction.

With interest rates on savings hovering in the low single digits, access to principal has become more important to retirees than the income it generates. It is for this reason that reverse mortgages have become so popular—people need the cash that’s tied up in their homes. And—ironically—how much of that cash is being borrowed out to maintain and make needed repairs to the home itself?

In a higher rate environment, a retiree could rely on the cash flow from the income on his investments—now he may need to draw down the investment itself to survive.

Is renting in retirement right for YOU?

Is renting the better option for all retirees? No, not for all—but then neither is homeownership. Each retiree, or prospective retiree, has to consider his or her housing situation in light of personal circumstances, and not rely on general assumptions or on “conventional wisdom”.

When might you be better off renting than owning in retirement?

  1. If you have few investments apart from the equity in your home
  2. If the necessity of taking a reverse mortgage is more than a remote possibility
  3. If your current house payment—with or without a mortgage—is higher than prevailing rents in your area
  4. If you’ll be carrying a mortgage into retirement that won’t be paid off any time soon
  5. When there’s a distinct possibility that you may need to make a move shortly after retirement; this could be for health reasons, to follow your children, or because now that you’re retired you don’t want to live in any one place
  6. When health problems or a desire to travel necessitate paying others to maintain your home
  7. When selling your home will mean the difference between a comfortable retirement and a life of struggle
  8. When you’re “over-housed”—the 4000 square foot home you raised your family in is three times more space than you need now and you’re tired of paying for what you aren’t using
  9. When there’s so much equity in your home that freeing it up will open up some…exciting life opportunities

Consider which path is best for you in light of the above questions—you may be surprised to find that renting is the better opportunity for you in your retirement years.

Fortunately the tax code offers favorable treatment if you want to sell your house and cash out. The IRS allows a one time exclusion from tax on the gain on the sale of your primary residence of up to $250,000 ($500,000 if married, filing joint) that will enable most people to liquidate their homes with little or no tax consequences.

Have you ever considered renting as part of your retirement strategy? Do you see any downsides? Are there other reasons to rent that I haven’t listed?

( Photo by Sands Beach Lanzarote’s )


21 Responses to Are Retirees Better Off Renting than Owning a Home?

  1. Red says:

    This is probably the most comprehensive post I’ve ever read getting readers to challenge the prevailing conventional wisdom. Most of the retirees that I know, even those with a paid off mortgage, complain about the costs of maintenance, and in the face of increasing pain and stiffness, the ability to do adequately perform that maintenance. I also hear them lament how having a house limits their ability to take off and go, see the kids, or travel the country, cause something might happen to the house. I’m 20 years away from retirement, but I must say, I’m thinking that owning a home might not be a good idea for me. Great post fearless blogger!

  2. Kevin M says:

    Hi Red – Here’s my thinking, a house may be an absolute necessity when you have a family, but once the kids are grown and gone, needs and circumstances change. Conventional wisdom is what often keeps retirees from selling and moving on.

    I also think that one of the under-appreciated components of retirement and retirement planning is flexibility. Most thinking and planning revolves around defending the trappings of the life you always had, rather than preparing for a very different life. I also think that’s why a lot of retirees don’t enjoy retirement to the fullest–they’re hanging on to too much baggage from the past. Do they really need it anymore, and if not, why continue paying for it?

    Thanks for the “fearless blogger” comment!

  3. Angela J. Shirley says:

    It would depend on whether you plan on leaving your stuff to someone when you die. And if they are willing to continue to pay taxes and whatever else is involved. Renting is good sometimes as it frees you up to enjoy your retirement without having to worry about keeping up on paperwork. Personally, I would love to be able to leave something for my only child – so buying a house is in my plan…

  4. the mortgage lending system has credibility affected. if it is possible to buy cash, that is always good.

  5. Kevin M says:

    Hi Angela, Life insurance is a lower stress way to leave something to your child. It would also have the advantage that it won’t have a mortgage on it, and your daughter won’t have to worry about the market value, or having to sell it. Just a thought…

  6. Angela J. Shirley says:

    LOL Kevin, I just came back to see if I could repost my comment as the system said the “server” was down, but I see my comment made it. Yippee.

    Yes, I will definately look into your suggestions – thanks :)

    My Website: Surviving Unemployment
    http://survivingunemployment.weebly.com

    **not sure if it got posted, guess the library computer is being a pain today**

  7. Kevin M says:

    Hi Angela–Both comments came through, but I saved this one because of your last line about using the library computer. There’s a message in there that’s worth sharing with others.

    If money is tight, cancel your internet connection and use the computers at the local library–they’re free! It’s not the best way to use the internet, but it’s an excellent way to save money and still be connected on the web at least temporarily. You can do research, conduct your job search and maintain email connections free of charge. It’s called “thinking outside the box”! (Thank you Angela!)

  8. Angela J. Shirley says:

    Welcome Kevin, and if folks want more ways to survive unemployment, they can visit my site below. I would also appreciate any other tips folks can pass my way – there is a contact form on the site. This recession is all about other folks helping others :) Thanks Kevin for all that you do – I look forward to visiting your site to see what NEAT stuff you have posted.

    My Website: Surviving Unemployment
    http://survivingunemployment.weebly.com

  9. Chris Ensey says:

    Hey, Kevin — Thanks again for the great article. This whole rent vs buy thing has been a hot topic lately, even for non-retirees!

    You’re definitely right that there are lots of ‘hidden’ costs to home ownership, like maintenance, etc. Plus, there’s also a bit less freedom to just pack up and go, if need be.

    I don’t want to sound like I’m on the ‘never own a home’ bandwagon, though. There are certainly pros to this, just as there are cons to renting. But, there is definitely a lot to consider, regardless of what you’re planning to do and when.

  10. Kevin M says:

    Hi Chris–You’re right there are advantages to both. It’s just that the rent advantage doesn’t get nearly as much press. Amid all the buy-hype–and that’s what it really is–people often don’t stop to consider that owning may not be the best choice in their particular circumstances. They buy and end up overpaying for something they never needed, or bought when renting would have served them better.

    Also, I think that the idea that everyone should be in a home was a huge part of the housing meltdown. Too many people were in houses they shouldn’t have been in. No down payment loans, no income verification loans–why did we need those except that people couldn’t afford to own otherwise. And how about subprime loans for buyers with bad credit? Most of the people who took funky loans to qualify would have been better off now if they never owned at all.

  11. Chris Ensey says:

    Hi, Kevin — You’re right that it was only a matter of time before the housing market fell through. I agree that there it was too easy for people to get into homes that they couldn’t afford.

    It seems like we’re now moving the other way a bit so that it’s more difficult to get a loan — even for more qualified borrowers. Hopefully, everything will settle down soon.

    Also, we probably talked about this before, but when you’re looking at buying and selling homes now, it doesn’t matter what it was worth in the housing heyday. It may never be worth that again! So, something else to consider when looking to buy or rent!

  12. Owning provides more security while renting provides more freedom. Though owning a home can provide a lot of emotional security, a house isn’t a liquid asset.

  13. Kevin M says:

    Hi Michael–That sums up the whole question in just two sentences. Well done!

  14. Amy Turner says:

    It makes sense to just rent if one is thinking of spending most of the time traveling. Having a house will surely hamper one’s desire to leave on a trip anytime he wants. Renting an apartment or house makes it easy to go without much hassle.

  15. Hi Amy – I’ve always been mystified by the number of homes that seem unoccupied. And I wonder why anyone would want to own a home they’re never in. It seems like a terrible waste of money, and would especially get in the way of retirement.

  16. A downside to renting in retirement, especially if it’s in a home (vs. a condo or apt.) could be a forced relocation if your landlord decides he wants to sell the property or is foreclosed on. Several years ago we bought a house to use as a rental that was being foreclosed on. The older couple living there was so pleased we stepped in to buy the property because they didn’t know where they were going to go. Of course, we let them stay.

  17. That’s an outstandint point Brian, renting is not without risks either. When you rent, you can never dig your roots in too deep. But that said, I’ve known some elderly who have stayed in rentals for 10-20 years, all in the same place!

    One advantage you do have as a tenant though is that if you’re a solid tenant the landlord will almost always want to keep you. Turnover costs landlords money, and every seasoned landlord has had the displeasure of having bad tenants. So for the most part, it’s not like you’re living on the edge never knowning if you’re going to be “tossed out on the street”. You have more control than you think, but it requires being responsible and being a good tenant.

  18. Jeremy says:

    Housing is a massive capital trap and you pay a huge penalty in the form of commissions to get your capital back out. Leverage makes it even worse.

    Buy a 500,000 home (a shack in some parts of the county, a dream home in others), with 20% down and that’s 100,000 locked up.

    Suppose you need to sell a few years after the purchase to get your money out. A 6% commission on 500,000 is 30,000–a whopping 30% of your equity!

    Any mutual fund that charged a 30% back end load would be pilloried as a scam.

  19. Hi Jeremy – You’re hitting on something that I became aware of back in my mortgage days. The transaction costs connected to real estate have become excessive. You mentioned a 6% real estate commission, but that’s only the beginning. There are mortgage related closing costs, that are often paid by the seller to induce a prospect to buy. As a convention, we used to estimate 10% for exit fees on the sale of a house. Most of the time, that estimate was right on the money. In my opinion 10% is far too much to cash out on a major investment. It gets even worse in a buyers market when that 10% is coming off of a reduced sale price. Liquidy is a very important but very under-estimated issue with housing. For the most part, liquidity doesn’t really exist with housing.

  20. Rick Caird says:

    An elderly couple across the street from me in Dallas were suddenly forced to move when the house was sold. It was very hard on them as they had lived there for 20 years. Second, if you own, you have a pretty good idea of the annual costs. Rent increases most years and increases more than the costs of owning a house. Sure, someone else pays for the new roof and the lawn maintenance, but you know as well as I do that those are priced into the rent. Given a proper sized place that you own, you are better of with the house than renting. When someone is young with few responsibilities, it is probably better to rent than to own, but not so much in later life. Oh, and you do need a one floor place, whether renting or owning. Age has a way of making stairs impossible.

  21. Hi Rick – Based on what I’ve seen, property taxes can skyrocket too. They aren’t as predictable as people tend to think. The same is true of homeowner’s insurance. A lot of retirees now pay more in taxes and insurance than they did for the whole house payment when they had a mortgage. Also, a lot of houses DO have stairs, and the elderly are reluctant to leave anyway. I think the moral of the story is that when you reach a certain age, nearly any living arrangement has its limitations. The advantage with renting is that you have the mobility to adjust to changing circumstances. With owning, you’re kind of stuck where you’re at – at least psychologically and emotionally.

Leave a reply