As Baby Boomers retire, they often consider downsizing their home. This especially true of "empty nesters," whose children are grown and have moved away. More recently, many Boomers are losing their homes due to the Great Recession, whether it be through foreclosure, short-sales or walking away from an untenable upside-down mortgage. The question is, what should they do now? There are good arguments for both buying a retirement home or simply renting one from here on out.
It used to be that owning your own home was an investment that could be expected to appreciate over time. As we have learned, this is not necessarily the case. Given the state of the economy, it is unlikely that home buyers will see much appreciation in market values for some time. In some areas, in fact, it may be ten years or more before the real estate market recovers to pre-crash levels, if ever. So let's simplify the decision of "buy versus rent" by removing any expectation of investment appreciation as a factor in our considerations.
Looking at "buy versus rent" as a strategy where the right answer is different for each person or family based on their unique circumstances, the benefits and risks associated with each choice can be generally summarized as:
Major Benefits of Buying a Retirement Home:
- Postpone some or all of taxes on capital gains from the sale of your previous home.
- After down payment, typically – but not always – have lower house payments.
- Annual tax deductions help higher-income retirees.
- Enjoy more control over a property than a tenant.
- Creates estate value for heirs.
Major Risks of Buying a Retirement Home:
- Property values could decline further.
- Not easy to relocate if necessary due to illness, job, divorce, etc.
- Annual costs (PITI, maintenance, HOA fees, etc.) are usually much higher than renting.
- Less liquidity – it can take a long time to sell a residence.
Major Benefits of Renting a Retirement Home:
- May be only option if you went through a foreclosure, deed-in-lieu of foreclosure or short sale.
- Takes less money to accomplish and it's faster to get into a retirement home.
- Not tied down to one place – you can move if you want.
- Savings may do better in financial investments other than the real estate market.
- Savings have more liquidity than being tied up in real estate.
- Annual housing costs are usually much less than owning a property.
Major Risks of Renting a Retirement Home:
- Rent may go up over time.
- Owner could sell out from under the tenants, forcing a move at the end of a lease.
- Renters forego many tax breaks.
- Depending on the amount and circumstances, you could be taxed on the profit from the sale of your previous home.
- Stocks or mutual fund investments could decline in value while property values increase.
Which choice is better? It really depends on each Boomer's unique circumstances. Retiring Boomers who have a nice financial nest egg and are in a higher tax bracket are generally better off buying a retirement home rather than renting. Those Boomers who have been financially hurt by the recession are likely in a lower income bracket and may have dings on their credit score too. They are probably better off renting. Remember, renting rather than buying a property preserves quick access to liquid investments that would otherwise be tied up in a real estate.
In the final analysis, much of it comes down to personal preferences. Many retiring Baby Boomers simply do not want to be tied down to one location. They would rather rent homes in different locations during their retirement years. Others desire the security of property ownership. As we have recently learned, owning a home is not for everyone, nor should it be. And Boomers may be the first generation in quite a while to abandon traditional home ownership during retirement in favor of mobility and more freedom.