How much home prices, rents and stock prices change can have a large impact on your outcome. Unfortunately, these are some of the hardest things to predict. If you choose to rent instead of buying, the calculator assumes that you’ll spend your would-be down payment on stocks or another investment. Owning a home is a financial commitment that requires you to plan ahead and reflect on where your life is headed. Before deciding whether to rent or buy, ask.
By Greg Daugherty, Next Avenue Contributor
By the time many of us retire we’ve become so accustomed to owning a home, that the idea of renting one might never occur to us.
But if you’re pondering a change of address in retirement, it’s worth considering all the angles of buying vs. renting, even if you haven’t been a renter since shag carpets were in style.
Home Prices Are Soaring
If you need to make this housing decision soon, you’ll want to take into account the recent run-up in home prices in many parts of the country since that could affect whether you can afford to buy.
The newest Case-Shiller composite index of 20 U.S. cities showed prices up 10.9% over the past year, the biggest gain since April 2006.
(MORE: Don’t Want to Move? How to Age in Place)
When you’re figuring out whether to buy or rent a place in retirement, a lot depends on your personal financial situation, of course. You’ll be factoring in such things as how much you’d get for selling your current home, your total savings and when andwhere you’ll retire.
A Strong Argument for Buying
That said, if you’re raring to relocate now, today’s near-record low mortgage rates make this an unusually opportune time to buy.
A study by the real estate website Trulia recently concluded that buying a home would be cheaper than renting in all of the top 100 U.S. metropolitan markets if you take out a fixed, 30-year, 3.5% mortgage and stay in the home for at least seven years. (The average mortgage rate has risen slightly since the study came out, to 3.75%.)
Trulia has a rent vs. buy calculator that will let you plug in your own numbers to see which way the balance would tip in your case.
If your retirement is years away, however, the picture could change. Higher mortgage rates, fast-rising housing prices or a combination of the two might make renting look like a bargain.
The Mortgage Issues
Of course, mortgages typically require a down payment, which can involve coming up with a serious chunk of cash up front.
(MORE: Should You Pay Off Your Mortgage Early?)
If you’ve sold another home at a profit, the down payment might not be a problem for you. But if you’ll have to tap your IRAs or other retirement accounts, that move could seriously cut into the amount of money you’ll have left for daily living expenses.
Withdrawing money from a retirement plan for the down payment also means you’ll lose the valuable future tax deferral on it and might owe taxes (maybe even a tax penalty) when you take out the cash.
Then there’s the question of whether you even want to carry a mortgage in retirement.
You can argue that one both ways from a financial perspective.
Paul Solman, PBS NewsHour business and economic correspondent, has an article on Next Avenue explaining when it makes sense to get a 30-year mortgage in retirement and when it doesn't.
But the mortgage decision is about more than finances. Many retirees report a psychological boost from not having a big debt hanging over them at this stage of life. And that’s worth something, too.
The Tax Angle
As you most likely know, if you buy a home, your property taxes will generally be tax-deductible, as will your mortgage interest payments if you finance the purchase.
If you rent, you’ll be out of luck, tax-wise, although you may be able to write off a portion of the rental as a home office if you run, say, a consulting business from there.
(MORE: Secrets of Claiming a Home Office Deduction)
Keep in mind, though, that tax deductions won’t be as valuable to you if your income and tax rate drop after you retire, which is pretty likely.
A $10,000 deduction for your mortgage and property taxes combined would be worth $2,800 if you’re in the 28 percent federal tax bracket this year (the bracket for joint filers with roughly $146,000 to $223,000 in taxable income), but only $1,500 if you’re in the 15% bracket (roughly $18,000 to $72,000 of taxable income).
So if you could save more than the amount of your tax savings by renting, then that might be the way to go, purely from a tax perspective.
Marge Schiller, a certified financial planner in Sarasota, Fla., says there’s another tax wrinkle to consider.
She points out that, by law, you’ll face required minimum distributions from your retirement accounts (other than Roth accounts) every year once you reach age 70½. Currently, you must take out about 3.65% of the total in your retirement plans in Year 1; the required distribution rate rises steadily from there.
So, if you have a lot of money in retirement accounts, your required minimum distributions could push you into a higher tax bracket. That would then make your mortgage and property tax deduction worth more to you and could tip your rent vs. buy decision toward “buy.”
The Investment Angle
You’ll also want to factor investing into your rent vs. buy equation.
Let’s say you sell your home of many years and walk away with a big profit as you enter retirement.
Unless you already own a second home or plan to spend the rest of your life backpacking, you’ll basically have two choices: buy another place, possibly a less expensive one, that will let you invest some of that equity or rent a home and invest all the money you made.
If you’re a capable investor, you might come out ahead by renting and investing your home-sale profits.
A portfolio made up of 50% stocks and 50% bonds delivered an average annual return of 8.3% from 1926 to 2012, according to Vanguard. That may be an overly optimistic number in today’s investment world, but it’s worth noting that the Yale economist Robert Shiller has found that housing has historically delivered an almost negligible return, once inflation is taken into account.
3 More Angles to Consider
Some of the most important questions you’ll want to ask yourself about buying vs. renting have little or nothing to do with money. For example:
If you buy a home, how long will you stay? The Trulia study based its calculations on owning for seven years. But the site noted that you’ll see less of an advantage from buying if you don’t stay that long, due in part to the upfront costs of purchasing a home, like closing fees.
Schiller, the financial planner, says retirees generally shouldn’t buy homes unless they intend to live in them for at least five to 10 years.
If you’ll be moving to a new area, she recommends renting for at least a year to rule out any unhappy surprises. “Some people find it hard to assimilate into the new community,” she says. “They miss their family back home or just don’t connect.”
Do you mind being tied down? Some retirees want the freedom to experience new places from time to time. That’s a good argument for renting, even if the cost is more expensive, since you’ll have an easier time pulling up stakes.
Other retirees, by contrast, like the feeling of rootedness that comes with being a homeowner.
Do you have pets? In some places, it can be difficult to find rentals that allow pets, Schiller notes. That can be true of condos as well. So if you can’t imagine your golden years without your golden retriever and are leaning toward renting or buying a condo, be sure to inquire about the rules where you’re looking.
This Housing Decision May Not Be Your Last
One final word on the subject: Keep in mind that where you move next may not be where you’ll stay throughout retirement. Given how long retirement can last these days, you could find yourself changing addresses several times and switching between renting and buying along the way.
Who knows? You might even be retired long enough to see shag carpets come back in style – although I wouldn’t bet the house on it.
Greg Daugherty is a personal finance writer for Next Avenue and other media outlets, specializing in retirement. He was formerly editor-in-chief at Reader’s Digest New Choices and senior editor at Money.
More from Next Avenue:
- 4 Paths to a More Fulfilling Retirement
- How Retirees Can Avoid Refinancing Troubles
- The Retirement Topic Nobody Likes to Talk About
- Is Your Hometown a Place to Grow Old? Mine Is
By Greg Daugherty, Next Avenue Contributor
By the time many of us retire we’ve become so accustomed to owning a home, that the idea of renting one might never occur to us.
But if you’re pondering a change of address in retirement, it’s worth considering all the angles of buying vs. renting, even if you haven’t been a renter since shag carpets were in style.
Home Prices Are Soaring
If you need to make this housing decision soon, you’ll want to take into account the recent run-up in home prices in many parts of the country since that could affect whether you can afford to buy.
The newest Case-Shiller composite index of 20 U.S. cities showed prices up 10.9% over the past year, the biggest gain since April 2006.
(MORE:Don’t Want to Move? How to Age in Place)
When you’re figuring out whether to buy or rent a place in retirement, a lot depends on your personal financial situation, of course. You’ll be factoring in such things as how much you’d get for selling your current home, your total savings and when andwhere you’ll retire.
A Strong Argument for Buying
That said, if you’re raring to relocate now, today’s near-record low mortgage rates make this an unusually opportune time to buy.
A study by the real estate website Trulia recently concluded that buying a home would be cheaper than renting in all of the top 100 U.S. metropolitan markets if you take out a fixed, 30-year, 3.5% mortgage and stay in the home for at least seven years. (The average mortgage rate has risen slightly since the study came out, to 3.75%.)
Trulia has a rent vs. buy calculator that will let you plug in your own numbers to see which way the balance would tip in your case.
If your retirement is years away, however, the picture could change. Higher mortgage rates, fast-rising housing prices or a combination of the two might make renting look like a bargain.
The Mortgage Issues
Of course, mortgages typically require a down payment, which can involve coming up with a serious chunk of cash up front.
(MORE:Should You Pay Off Your Mortgage Early?)
If you’ve sold another home at a profit, the down payment might not be a problem for you. But if you’ll have to tap your IRAs or other retirement accounts, that move could seriously cut into the amount of money you’ll have left for daily living expenses.
Withdrawing money from a retirement plan for the down payment also means you’ll lose the valuable future tax deferral on it and might owe taxes (maybe even a tax penalty) when you take out the cash.
Then there’s the question of whether you even want to carry a mortgage in retirement.
You can argue that one both ways from a financial perspective.
Paul Solman, PBS NewsHour business and economic correspondent, has an article on Next Avenue explaining when it makes sense to get a 30-year mortgage in retirement and when it doesn't.
But the mortgage decision is about more than finances. Many retirees report a psychological boost from not having a big debt hanging over them at this stage of life. And that’s worth something, too.
The Tax Angle
As you most likely know, if you buy a home, your property taxes will generally be tax-deductible, as will your mortgage interest payments if you finance the purchase.
If you rent, you’ll be out of luck, tax-wise, although you may be able to write off a portion of the rental as a home office if you run, say, a consulting business from there.
(MORE:Secrets of Claiming a Home Office Deduction)
Keep in mind, though, that tax deductions won’t be as valuable to you if your income and tax rate drop after you retire, which is pretty likely.
A $10,000 deduction for your mortgage and property taxes combined would be worth $2,800 if you’re in the 28 percent federal tax bracket this year (the bracket for joint filers with roughly $146,000 to $223,000 in taxable income), but only $1,500 if you’re in the 15% bracket (roughly $18,000 to $72,000 of taxable income).
So if you could save more than the amount of your tax savings by renting, then that might be the way to go, purely from a tax perspective.
Marge Schiller, a certified financial planner in Sarasota, Fla., says there’s another tax wrinkle to consider.
She points out that, by law, you’ll face required minimum distributions from your retirement accounts (other than Roth accounts) every year once you reach age 70½. Currently, you must take out about 3.65% of the total in your retirement plans in Year 1; the required distribution rate rises steadily from there.
So, if you have a lot of money in retirement accounts, your required minimum distributions could push you into a higher tax bracket. That would then make your mortgage and property tax deduction worth more to you and could tip your rent vs. buy decision toward “buy.”
The Investment Angle
You’ll also want to factor investing into your rent vs. buy equation.
Let’s say you sell your home of many years and walk away with a big profit as you enter retirement.
Unless you already own a second home or plan to spend the rest of your life backpacking, you’ll basically have two choices: buy another place, possibly a less expensive one, that will let you invest some of that equity or rent a home and invest all the money you made.
If you’re a capable investor, you might come out ahead by renting and investing your home-sale profits.
A portfolio made up of 50% stocks and 50% bonds delivered an average annual return of 8.3% from 1926 to 2012, according to Vanguard. That may be an overly optimistic number in today’s investment world, but it’s worth noting that the Yale economist Robert Shiller has found that housing has historically delivered an almost negligible return, once inflation is taken into account.
3 More Angles to Consider
Some of the most important questions you’ll want to ask yourself about buying vs. renting have little or nothing to do with money. For example:
If you buy a home, how long will you stay? The Trulia study based its calculations on owning for seven years. But the site noted that you’ll see less of an advantage from buying if you don’t stay that long, due in part to the upfront costs of purchasing a home, like closing fees.
Schiller, the financial planner, says retirees generally shouldn’t buy homes unless they intend to live in them for at least five to 10 years.
If you’ll be moving to a new area, she recommends renting for at least a year to rule out any unhappy surprises. “Some people find it hard to assimilate into the new community,” she says. “They miss their family back home or just don’t connect.”
Do you mind being tied down? Some retirees want the freedom to experience new places from time to time. That’s a good argument for renting, even if the cost is more expensive, since you’ll have an easier time pulling up stakes.
Other retirees, by contrast, like the feeling of rootedness that comes with being a homeowner.
Do you have pets? In some places, it can be difficult to find rentals that allow pets, Schiller notes. That can be true of condos as well. So if you can’t imagine your golden years without your golden retriever and are leaning toward renting or buying a condo, be sure to inquire about the rules where you’re looking.
This Housing Decision May Not Be Your Last
One final word on the subject: Keep in mind that where you move next may not be where you’ll stay throughout retirement. Given how long retirement can last these days, you could find yourself changing addresses several times and switching between renting and buying along the way.
Who knows? You might even be retired long enough to see shag carpets come back in style – although I wouldn’t bet the house on it.
Greg Daugherty is a personal finance writer for Next Avenue and other media outlets, specializing in retirement. He was formerly editor-in-chief at Reader’s Digest New Choices and senior editor at Money.
More from Next Avenue:
© Terry Vine/Getty Images Blue house for saleRenting vs. buying a home is a big decision, and there are pros and cons to each option. In fact, a higher percentage of U.S. households are renting than at any point since 1965, according to a Pew Research Center analysis of U.S. Census Bureau data released in 2016.
For some people, renting comes down to what they can afford at the moment.
'I was a long-term renter because I wanted to wait to buy until I could afford to stay in my current neighborhood,' says Atlanta resident Jennifer Walker, a public relations executive who bought her first home this spring. 'I didn't realize that there were affordable options.'
For Walker and other aspiring homebuyers, working with a savvy real estate agent and lender can help them realize they're ready to take the plunge.
The answer to the rent vs. buy a home debate isn't so cut and dried. Here are five questions to ask when considering renting vs. buying:
- What can you afford?
- How long do you plan to stay in the home?
- Do you want stability or flexibility?
- Can you afford to be responsible for home repairs/maintenance?
- What are your financial, career and family goals?
Renting vs. buying a house: Calculating the costs
There are different costs associated with renting and buying. Using Bankrate's rent vs. buy calculator helps you break down some of these expenses.
Most rental properties require a security deposit, which protects the landlord against damage caused by the renter. You'll usually put down the first and final month's rent payments when you sign a lease. When evaluating a lease contract, ask if your monthly rent includes utilities, such as water, electric, gas, cable or internet.
For homebuyers, one of the biggest ongoing costs of homeownership is your monthly mortgage payment, which includes the loan's principal and interest amounts. Your payments can go up or down over time if your loan is variable rate or your property taxes and homeowners insurance premiums change. If you put less than 20 percent down, your lender will typically require you to purchase private mortgage insurance, or PMI, which drives up your monthly payments, too.
Be prepared for some of the hidden expenses that come with homeownership that catch many first-time homebuyers off guard and can lead to buyer's remorse.
'During the process, the buyer will need to pay for a home inspection and for any quotes for repairs needed from contractors. They will also put down at least 1 percent of the sales price for earnest money,' says Michelle Hopson, a sales agent with Compass Real Estate in Dallas.
Having a sizeable down payment -- anywhere from 3 percent to 20 percent of the home's purchase price -- is expected. If you're purchasing a property in a homeowner's association, or HOA, you'll need to factor in monthly HOA dues, which can cover services like landscaping, exterior maintenance and community amenities.
Differences between renting vs. buying
Renting vs. buying a home isn't a matter of ownership. Here are other key differences between the two options.
- Buying a house can build equity
Homebuyers can capitalize on the equity their home accumulates over time. That means if the home's value goes up, you'll cash in on the higher value when you sell. Plus, with a fixed-rate mortgage, you won't have to worry about rising rents.
'Interest rates are so low now,' Hopson says. 'That means borrowing money is very inexpensive today. In Dallas, where rents are high, it can almost be as affordable to purchase as to rent in many parts of the city. If you can qualify for a home and build some equity, that ultimately makes more sense than renting.'
- Tax implications
Another factor for buyers to consider is whether you will be able to deduct the mortgage interest at tax time. Tax laws allow those who itemize their taxes to write off their mortgage interest payments. However, not everyone is eligible to itemize deductions, and changes to the tax laws in 2018 means that more people won't be able to deduct as much of their mortgage interest and property taxes as they used to.
- Home maintenance costs
Homes need repairs and maintenance over time, and when you're renting, those costs are generally the landlord's responsibility. For instance, in an apartment, if the HVAC system or refrigerator breaks, the landlord has to fix it. On the other hand, as a homeowner, you'll be on the hook for those repairs and ongoing seasonal maintenance, and they can add up fast.
Katie Schanck, a Realtor with Keller Williams in Atlanta, advises her clients to factor in these costs when evaluating if they can afford to purchase a home. She encourages buyers to carefully review the seller's disclosure and get a home inspection to be aware of potential red flags.
- Want flexibility? Rent
If you're moving to an unfamiliar city, have an unstable job situation or don't know what neighborhood will feel like home, renting for a period of time can be a great option.
'During that rental period, people really get a sense for what they like or don’t like, and we can also start exploring different purchasing options during that time,' Schanck says.
Consider your life stage and goals
While no one has a crystal ball, it's important to evaluate your current life situation and how much it's likely to change in the immediate future.
'I recommend clients who are going through life changes, like divorce or downsizing, to rent as a way to decompress before making a large purchase that may not be right for their new lifestyle,' Hopson says.
Schanck agrees, encouraging her clients to think ahead.
'For clients who have a changing personal situation, such as getting married or planning to have a child soon, I encourage them to look at properties they're not going to outgrow quickly,' she says. Another consideration: Can you afford a home that will fit your lifestyle in the next few years, or will a tight budget limit your options?
'It may be better to wait or rent for a little while until they can afford the home they can live in for some time or grow into with their family,' Schanck says.
Bottom line: Choose what's right for you
It may be helpful to talk with a trusted real estate agent to help you think through the decision to rent vs. buy a home. Here's a list of pros and cons to help you on your way.
Renting vs. buying a home: A comparison
Buying
Advantages
- May build equity and credit
- No landlord to answer to
- More stability (especially with schools)
- Possible tax benefits
- Can improve or upgrade home to your taste
Disadvantages
- Requires substantial money, paperwork up front
- Could lose money if home values decline
- Extra expenses beyond mortgage payments
- Rising home prices and low inventory in many markets
- Responsible for repairs, remodeling
Renting
Advantages
- Fewer upfront costs and paperwork
- Freedom to be more mobile
- Not responsible for maintenance, repairs
- No need to worry about falling home values
- Build credit (if your landlord reports rent payments to the credit bureaus)
- No property tax bills
Disadvantages
- Landlord can raise rent or sell the property
- Choices may be limited depending on vacancies
- Might have to move multiple times
- Don't build equity
- No tax benefits