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Pros and Cons of Renting in Retirement




As the certainties in financing retirement have evaporated, at least you can count on one asset: your home. Fueled by a real estate boom, you've seen the value of your home rise even with the recent slide in the market. If you're one of the fortunate 69 to 80 percent (depending on the source) of the over-65 population who owns your home free and clear, you're in even better shape.

Owning your home after years of sweating to pay off the bank is sweet. But is it a good idea to stay in that home throughout your retirement? Many retirees elect to downsize, buying a smaller home or condo. Some are venturing into uncharted waters by renting and investing the money they receive from selling their home, or avoiding homeownership altogether.

"I am a 75-year-old woman who rents a two-bedroom apartment in a four-unit apartment building," says Emily Kimball, motivational speaker and owner of The Aging Adventurer in Richmond, Va. "I feel much more comfortable paying rent and having their handyman come and solve my maintenance problems. I have assets but they are for future health problems or more travel and adventure."

When deciding whether to stay in your present home or move and buy or rent, you need to take two factors into consideration: finances and emotions. Renting may make economic sense, but if a great deal of your emotional security comes from the stability of owning your own home, it may make sense to own. On the other hand, if you'd rather live without the headaches of maintaining a home, renting may have more appeal.

Your home as an investment
Conventional wisdom and the real estate boom of the past few years have fostered a mentality that your home is a good investment, one that can help finance your retirement as certainties around company-financed pensions and the viability of Social Security have faded. Unfortunately, it's not true.

While a home provides a roof over your head and limited appreciation potential, a study by the Fidelity Research Institute reveals that home prices have risen on average by 5.9 percent on an annual basis since 1963. Home prices are certainly capable of sharp run-ups in values, but they also tend to decline as well, sometimes for long periods.

A home is not only expensive to maintain, but mortgage interest costs add hundreds of thousands of dollars to your homeownership bill, ultimately cutting whatever profit you might receive when you sell. The mortgage interest deduction does offset some of those interest costs and mortgage fees, but not as much as you'd think.

When calculating the potential profit from selling your home, don't forget to deduct ongoing expenses -- mortgage interest, property taxes, insurance, maintenance, major repairs and renovation projects.

Renting temporarily
If you're not sure which way to go and are determined to sell your house, Mike Dorula, CPA, recommends renting on an interim basis, which is especially useful for retirees who want to relocate to a new community. "Many seniors, who are considering moving to a specific retirement community or to a new area, rent first to make sure they like it," he says. "My sense is that renting is cheaper in the short run, but more expensive in the long run."

This approach can work to test the waters of renting in general to see if it's for you. But before taking the plunge of renting -- either on an interim or permanent basis -- make sure to factor in all the costs of renting. Many would-be renters forget to include renters' insurance, security deposits and extra fees for covered parking spots and other amenities when they make their cost calculations, says Marion Somers, a geriatric care manager in Brooklyn, N.Y. known as Doctor Marion.

Bankrate's renting vs. buying calculator helps you crunch your own numbers.

Economics of buying vs. renting

If, like many retirees you've paid off your mortgage, you won't benefit from the mortgage interest deduction. But your monthly overhead costs of property taxes and maintenance likely will be fairly low.

Arguments against renting

Warren Bland, author of "Retire in Style: 60 Outstanding Places Across the U.S.A. and Canada," notes that converting the proceeds of a home sale into income via a certificate of deposit may provide what seems like a nice chunk of income -- $22,500 a year after tax on $500,000 invested at 6 percent -- but it may not go far in the rental market. "In most urban real estate markets, you would pay at least $2,000 a month -- $24,000 a year -- to rent a comparable property. Poof! There goes your additional interest income."

When home prices are rising, rents generally increase as well, Bland adds, saying, "Higher rents will decrease the overall purchasing power of renter's incomes whereas higher home values accrue to the homeowner or his or her heirs. The imputed rent rises, but the homeowner doesn't have to pay it or taxes on it."

Freddie Mac, the government agency that guarantees mortgages, provides a guide to owning and keeping a homeand work sheetsfor budgeting homeowner costs, maintaining and repairing appliances and hiring a contractor for renovations.

"Renting is generally cheaper in the short run, but there is a point a certain number of years out where it gets more expensive to rent and less expensive to own," says Dorula. "Homeowners can tap into their equity in a number of ways, and that option isn't open if you rent."

Emotions of owning vs. renting
While the emotional aspects of renting are less concrete than the financial aspects, they are an important part of the equation. Carefully exploring your attitudes and your ability to adapt to changes going forward is a must.

"There is no one-size-fits-all," Doctor Marion says. "I recommend that seniors talk to their friends who have been through the experiences of staying in their present home, downsizing or renting to get an idea of what it's like. You also need to think about your needs going forward -- do you want freedom from responsibility, do you want to travel? That gives you a baseline to make these types of big decisions."

Renting provides more freedom, but owning provides more security. "Owning provides more control," says Dorula. "When you rent there is always a chance that ownership of the building where you live could change hands or the property could go condo and you'd have to move. If I decided to rent, I would insist on a long-term lease."

On the other hand, if your health or your spouse's health fails, you may need to move to an assisted living or nursing care facility on short notice. "In a down market, it can be very difficult to sell a house," says Doctor Marion. While owning a home can provide a lot of emotional security, a house isn't a liquid asset.


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