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Money February 2013

Dollar Sense

Which Housing Option is Best for Seniors – Rent or Buy?

By Teresa Ambord

When you are renting, you are paying the landlord a profit, and you may not be able to have a pet. But you won’t have to deal with maintenance and you won’t tie your money up in an asset that can be hard to sell. There are good arguments for both sides, and the decision can be complex.

The traditional wisdom is that everyone should own a home. But when you are in or near retirement, is that the best choice for you? Often retirees face a dilemma. The house they raised the kids in is now too big. The cleaning, the maintenance, the insurance, the utility costs for a big home… who needs that? On the other hand, you generally get more for your money as a homeowner, and have more say over what you do with your property. When you are renting, you are paying the landlord a profit, and you may not be able to have a pet. But you won’t have to deal with maintenance and you won’t tie your money up in an asset that can be hard to sell. There are good arguments for both sides, and the decision can be complex.

Before you settle on a plan, take a careful look at some of the pros and cons of buying and renting.

 

Homeownership: The Upside

  • If you still file tax returns and you itemize, your mortgage interest and property tax payments provide a tax break, though you need to evaluate whether your tax savings are worthwhile. Ask your tax preparer for a breakdown of what you are actually saving.
  • You have an investment and a significant asset which you may wish to pass down to your children, even if it is not rising in value right now.
  • You can have pets if you wish, subject to homeowner association fees and local ordinances that may limit the number of animals you can have.
  • You are more likely to have garden space, storage space, ample parking, and a garage.
  • If you need special equipment installed, like ramps at entrances or safety bars in the bathroom, you won’t need permission. This can also be a “down” because you’ll have to pay for the alterations yourself.

 

And the Downside

  • You are subject to inflation that can affect your homeowner insurance and property taxes, and possibly your mortgage, depending on the details.
  • There has been talk in recent years of eliminating the mortgage interest deduction as a tax break. If the tax savings is a major factor in your decision to purchase, you may regret your decision down the road.
  • Your home – which may be your major asset – is not a liquid investment. If you needed to sell it fast, there is a good chance you’d have to sell it low.
  • Unexpected repairs are up to you. Can you financially manage major repairs, like the cost of a new roof or a water heater? If Mother Nature pulls a fast one, like a flood or fire, even if the damage is covered by your homeowner insurance you’ll still need to cover the deductible and negotiate with repair personnel.
  • Maintenance is your responsibility. Are you able and willing to mow the lawns and rake the leaves? If you live in an area that gets snow, are you up to handling snow removal or paying someone to do it?

 

Renting: The Upside

  • Some say renting is like buying an insurance policy. If the roof leaks, it’s the landlord that has to pay for it, not you. So even if you pay more in rent than you would for a mortgage, there are no repair and maintenance costs. When disaster strikes, such as a tree falling on your home, you will be inconvenienced but you will not have to pay repairs.
  • If the housing market sinks farther, that is not your problem.
  • If you need special equipment, like ramps or safety bars, rentals may be available that are already outfitted for your needs, without you having to lay out extra cost.
  • Renting allows flexibility. If you find you have rented in an unsuitable neighborhood, or if the neighborhood deteriorates, you can move. Not that moving is easy at any age, but it is far better than waiting to sell your home, possibly losing money in the process. One retiree who had some funds to spare wanted to move to a new town, but he was hesitant to purchase in an unfamiliar area, so he combined the options of renting and buying. While he put his home on the market, he rented a small affordable duplex in the new town, and lived in it for a year to be sure this was a place he wanted to settle.

 

And the Downside

  • Rents can be raised, and unless the economy improves significantly, they probably will increase as property owners try to survive. If you own your home and have a fixed rate mortgage that is affordable for you, there are no such unexpected surprises (although as noted earlier, taxes and insurance can rise).
  • Landlords can lose properties to foreclosure, making it necessary for tenants to relocate too.
  • Even if you have good neighbors, renters come and go faster than homeowners so today’s good neighbors may be replaced by tomorrow’s bad ones.
  • Neighborhoods that are made up mostly of renters tend to be less stable and predictable. If you’ve evaluated your needs and have decided that purchasing a home is right for you, here is one more consideration. Where do you see housing prices headed? In some areas of the United States the sagging housing market has started to turn around, while other areas are slower to rebound. If you believe prices will continue to fall, it may be smarter to wait and buy a home later.

Whatever you do, do not make the decision without talking to a trusted advisor who is impartial. It might be nice to contemplate new digs at this stage of your life. And if moving and then staying put is the goal, take your time to find the place you want to call home for a long, long time.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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