"Most of all, remember this is one of the more important decisions that you'll make in retirement..."
Hello again and welcome to this month’s edition of retirement insights.
Today I want to talk to you about a topic that tends to come up all the time when planning retirement scenarios with clients. And I think especially here in upstate NY. That is, what to do when you change homes in retirement. And more specifically with that topic, is the question: Are you better off buying a home or renting one?
The choice depends on a great number of factors. So what are these factors? What do you need to figure out if you should be a home owner or a renter in retirement?
Let’s take a look.
The first and I think the largest factor that you need to weigh out is the amount of time that you can commit to a new home.
From a purely financial perspective remember that there are upfront costs that you’ll have as a homeowner that you just don’t have as a renter. Costs like real estate commissions and closing costs. Between those two costs alone, you figuring on adding 5-9% on every real estate transaction. That takes time to overcome. From that perspective alone, it’s tough to justify buying a home if you cannot commit to at least five years there.
The next most important factor to look at is your cash flow. Forgetting a mortgage payment and rent, owning a home generally has a lot more expenses than renting. Think about it. You have property taxes, insurance, repairs, maintenance items like landscaping, snow removal (if you happen to stay up north), pest control, home improvements, and so on.
As a renter you pretty much just pay for rent and utilities.
If you’re considering owning your retirement home you must also realize that some of these expenses will come up unexpectedly and they can sometimes carry a pretty hefty price tag. If you’ve had to completely repave your driveway or replace a roof recently, you know exactly what I’m talking about! When you’re a renter, the landlord takes care of all that stuff.
Added into this factor is what to do with your liquid assets. You know, your cash. Let’s assume you’re downsizing from your current home. If you buy a new home, does it make sense to put the money you got from selling your old house down on the new one? Maybe have no mortgage – or perhaps a lot smaller one?
Or, if you’re renting, do you need draw from that pool of cash to cover the rent each month? Maybe you have enough retirement income
to cover those costs and then you can keep the proceeds from selling your old home. If that’s the case, are you willing and able to invest that money?
There really are two critical questions in there. 1. What’s your need for the liquidity and 2. What kind of return can you get on your money if you do indeed invest it? You must realize that to have no mortgage means you’ve given up a tremendous amount of liquidity. For example, maybe you had to put down half or more of the proceeds that you got from selling your home to be able to pay cash for your new home. That’s cash that as a renter you would be able to hang onto- and possibly invest. But then, investing that money might introduce market risk that you’re not comfortable taking. This is a factor that really needs to be laid out for you so that you can make a clear decision.
Another, less often thought about factor is that of long-term healthcare. The Medicaid system has put in some protections for homeowners and their spouses such that they may be able to stay in their home even if the other spouse is receiving Medicaid benefits. If instead, you take a couple that was renting and had a portfolio of investments from the sale of their home, they may be forced to spend down that portfolio to a point where they could no longer afford to pay the rent.
There are other personal factors are important to consider when looking to buy versus rent as well.
First, if you have pets, you may not be able to have them in a place that you’d like to rent. You tend to have much more freedom in a place that you own versus the one you rent from someone else.
To that, your ability to change or customize a place to your personal liking is going to be far better in a
home that you own versus a place that you rent. But freedom in the home also means freedom to change your home.
Meaning, it’s a lot easier to pick up and go to another city or state when you rent versus when you own. But when you rent, are you really ever home? A lot of people think not.
Many folks just really like the pride of home ownership and feel like a home isn’t really their home unless they own it.
Now, when you’re weighing out all these factors, you can get some initial help with some of the financial stuff with tools available for free online. You can Google “rent versus buy calculators” for example, and try to get your hands around the numbers somewhat. You can also look up another important item that I haven’t mentioned yet, and that is the price to rent ratio.
This depends on the city that you’re looking to live in
and what it is, is the ratio of the average home price to the average annual rental payment. A higher ratio means that it will be relatively more expensive to buy a home in a certain city than it is to rent there. Think about the home prices in a place like San Francisco versus a city with low property values like Detroit and you’ll see a huge difference in price to rent ratios between those two cities. I highly recommend doing a search for that in the area you’re looking to live.
Most of all, remember this is one of the more important decisions that you’ll make in retirement. It‘s truly beneficial to work with a knowledgeable financial planner by your side. Someone who can help you uncover what factors are most important to you, can help you lay out and analyze all the financial variables that are involved, and can help you make the decision that serves you best.
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Thanks and see you next time!