Is Renting Better in Retirement?

[ENT Doc]

This idea is more for those planning on a more traditional retirement age with the mortgage paid off, not early retirement with kids still at home.  Did a spreadsheet (attached) comparing the eventual sale of a home (going into a nursing community or living with children) vs selling and renting instead (with the after-tax sale price invested in a taxable account).  The results depend on a wide variety of assumptions, but from a strictly financial perspective there are many instances where I found renting to be superior.  Other reasons renting might be superior to owning in one's 70's-80's (and beyond):

1. Renting allows for you to be dynamic - can move easily if you want depending on future developments/costs and possible estate tax
2. Renting involves a LOT less hassle/time as compared to buying/owning a place not shown in obvious costs
3. It might be easier to find a reasonable rental in your area than a smaller home to buy if in a HCOL area and you want to stay there.
4. Allows you to turn your assets from illiquid to liquid to allow for the reduction of the size of your estate in a tax efficient manner (gifting, etc.) with less hassle for the people who have to manage the estate on passing (provided you are affected by federal and/or state estate tax)

Downsides:

1. Emotional nature of leaving a home you've been in for many years.
2. Possibly being forced to move when you don't want to w/ added moving costs

Have people given thought to this concept rather than downsizing to a smaller home?  Thoughts otherwise?

[DMFA]

Well, if you've got an inflation-adjusted fixed income (like a pension) that is expected to rise at the same rate as your rent, and you're not particularly attached to one place over another, or if you want to live in a retirement community that rents instead of sells...I could see many ways in which it would be superior to rent.

I don't think it's a decision I'd personally make, but the liability and upkeep of home ownership may not be something I'm so keen to do in the future...who knows?  I could never really rule it out.

[Bmac]

What about downsizing to a condo bought with cash? Many of the advantages of renting (low maintenance and upkeep, easy to leave for prolonged vacations) without the disadvantages of renting (increasing rent, needing to move, etc.) I think that is what we would like to do once the kids are out of the house.

[DMFA]

Bmac wrote:

What about downsizing to a condo bought with cash? Many of the advantages of renting (low maintenance and upkeep, easy to leave for prolonged vacations) without the disadvantages of renting (increasing rent, needing to move, etc.) I think that is what we would like to do once the kids are out of the house.

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You're still on the hook for upkeep (in many cases), insurance (you're not legally compelled if you own outright, but why wouldn't you?), and for property tax on the increasing value, but depending on your wants or needs, that's also a great idea.  I wish my parents had wanted to do this, but instead wasted plenty of interest and tax on way too much house.

[Bmac]

It would seem the upkeep and maintenance of a condo would be minimal. Mostly taken care of by HOA. Maybe have a “cleaner” check on it biweekly during absences. Sure property taxes and insurance will go up but I wouldn’t think more than rent, which could potential skyrocket without rent control (I presume is uncommon).

[ENT Doc]

I'm hoping my parents make the decision to sell their home.  Whether it be owning a big house, a condo, or renting there are costs that are beyond your control.  I just don't think a big house is worth the headache and ties up too much capital.  The condo idea seems like a nice blend but it depends on the area.  Worth evaluating on my next tab in the spreadsheet!

[q-school]

We bought my parents a townhouse where they mow lawns and shovel for residents. Association fees expensive. Worth it. Property taxes terrible. In good school district which they won't directly receive any benefit from.
Way better than big house they left but still pain in ******************. Mom wants to move to assisted living but doesn't want to pay for it. Doesn't want to pay for property tax. Maybe can't be happy. She looked at renting as well but I don't think she has it in her to get rid of enough stuff to downsize further.

[VagabondMD]

I have been selling my wife on this very idea for the last couple years. I have a ways to go. I am thinking that when my second (and last) child graduates from high school in 2020, we both retire from our regular jobs and downsize into an apartment. With a smaller local footprint, and less money tied up in the primary residence, we could spend a month in AZ in the winter and do some international slow shoulder season travel, a month at a time, twice per year.

Owning and maintaining the house is a chore and large expense, and my wife is strangely attached to it. Perhaps when the kids settle down, we might want to move closer to them, wherever they end up...or not.

[Bmac]

I am totally on board with that plan and it is more or less what my wife and I hope to do when our children are off to college. Do you truly mean apartment (rented) or condo (owned)? I think I favor the latter. I'm just not sure I am comfortable with renting longterm, although selling the house and renting an apartment would sure create a lot of cash for the future. I just worry that renting would become much more challenging in the later years.

[The White Coat Investor]

I think you have the same main issues as before retirement. Will you be there a long time? If so, then buy. If not, then rent. There are ways to get liquidity out of the home if you need it without selling it. A reverse mortgage for instance.

[EJ at Dads Dollars and Debts]

Also fixed costs. You rent and you know what you are paying monthly. No surprise water heater to replace or other big maintenance issue.

[G]

Vagabond MD wrote:

my wife is strangely attached to it

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I am in the same camp as your wife.  The less I work, the more I love my big house.  It's probably because we moved continuously when I was little.  Even from med school to big house, I had 9 addresses, not counting the extended-stay hotels and that two month stint on a friend's couch (DT, if you're reading this, thank you!).

Maybe I'll feel different when my own kid is older, Vagabond?

It's an interesting financial question, ENTDoc.  That spreadsheet made my head swim.  A couple intangibles: For owning, I know that ultimately The Man requires me to pay property tax, I have a pretty good idea what it'll be next year; but a landlord can mug me with each lease renewal.  Don't forget homestead protections.  Also, as I spend more time at home, I have more patience for sitting, reading a book, waiting for a contractor to show.

[StarTrekDoc]

FIRE? Own

Getting up there -- Thinking RV living for a some time and downsizing to condo/airbnb

Waning years -  mooch off the kids

[ENT Doc]

BMac, this spreadsheet really only covers the hold vs rent decision.  Indeed that bolus of cash on sale allows for you to realize it's potential out there in the market where historical returns have outpaced real estate.  The downside, of course, is that your fixed expenses are higher with renting (this of course excludes the random $10k roof repair, random upkeep costs, and the time needed for them that are worse with owning).  I think moving around would be tough as well, but if a longer term lease could be signed then I think that could be controlled for (with appropriate clauses for termination, like the death of a spouse).  The flexibility has its upsides as well, such as moving to be closer to grandkids, or avoiding estate tax.  I'm priming my wife now, and we are likely a few decades away from pulling the trigger on retirement.  Surprisingly, she was open to it even now.

[Bmac]

q-school wrote:

We bought my parents a townhouse where they mow lawns and shovel for residents. Association fees expensive. Worth it. Property taxes terrible. In good school district which they won’t directly receive any benefit from.
Way better than big house they left but still pain in ******************. Mom wants to move to assisted living but doesn’t want to pay for it. Doesn’t want to pay for property tax. Maybe can’t be happy. She looked at renting as well but I don’t think she has it in her to get rid of enough stuff to downsize further.

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Yes, it seems like downsizing by buying a townhouse would be the worst of both worlds.  Upkeep/maintenance costs not much cheaper/easier than a single family home. None of the security and privacy of being in a larger condominium building which would make prolonged travel easier.