How To Establish If You Should Rent Or Own Your Home

Renting or owning a home has pros and cons; the decisions ultimately depend on where you see yourself during retirement. There is no right or wrong answer; your budget and plans matter. Here are some tips to determine which option might be a better fit for you. 

Social Security and Your Expenses
Social Security and Your Expenses

Generally, when contemplating retirement, house ownership provides the greatest control over your living environment and monthly expenditures. However, there are situations in which financial advisers may recommend renting.

How to determine whether to purchase or rent a retirement home:

People who sell long-term residences may be taxed. Those who are migrating may benefit more from renting than buying. Renting may also be advantageous for retirees who frequently relocate, as buying a home can be costly.

Current high borrowing rates may encourage individuals to rent. At the same time, Renters anticipate annual rate increases.

People who sell long-term residences may be taxed.

Numerous retirees have owned their current residences for many years. If the value of your property has grown substantially from the time you acquired it, capital gains tax may be due on a percentage of the revenues. Subtract the initial purchase price from the final selling price to determine the increase in value. Profits from the sale of a long-term principal residence that surpass $250,000 for individuals and $500,000 for married couples are generally subject to capital gains tax.

Consider if you lived in a home for fifty years; the ratio to cost basis to its market worth is astronomical. Daniel Hawley, president of Hawley Advisors in Walnut Creek, California, explains there is no way to sell this home without incurring a capital gain. Most people aged 65 and older are in the same position, and thus any choice to sell and subsequently rent elsewhere is contingent on their willingness to pay a capital gain tax.

When relocating to a new area, renting may be better than purchasing a home.

Numerous retirees and pre-retirees fantasize about selling their houses and migrating to a warm-weather retirement destination. However, you should be cautious about purchasing a property in a city or community where you have not spent much time.

Many retirees are selling their primary house. They plan to rent in Arizona or Florida for a year or two while determining where they want to settle down, Senior wealth adviser at Hightower Wealth Advisors in St. Louis, Zach Ungerott, explains. His firm recommends renting first, especially if they are uncertain about their final destination.

Hawley suggests a “shopping paradise” by renting a new residence in the desired retirement area, such as Hawaii, while leasing your existing home.

Renting Makes Sense for Retirees With Multiple Relocation Plans

You may relocate to a different neighborhood or even a new state, only to dislike it later. Some retirees become restless in one location and relocate to begin a new experience. According to Hawley, each of these transactions is costly to acquire and sell. If you anticipate frequently moving throughout retirement, renting may be a better alternative.

Moving is Expensive.

Each relocation might potentially cost thousands of dollars. There are huge costs connected with obtaining a mortgage and paying interest, and the shorter the period you remain in one place with a mortgage, the more difficult it is to come out ahead. If you know, you’ll be in a location for at least five years, taking out a mortgage or purchasing a home if you have the resources to do so makes sense. With each payment, you’ll be building equity.

Relocation also has social consequences.

 Getting established in a new area takes time, including making acquaintances and acquiring new services. According to Hawley, relocating after retirement is typically not an intelligent option for various reasons. People are rooted in their local communities, where they can access physicians, other service providers, and churches.

High-interest rates may induce individuals to rent.

Interest rates are rising rapidly, and the Federal Reserve is likely to increase them more. The high cost of borrowing has increased the expense of owning a new house for many individuals. With rates on a 30-year mortgage at about 7%, that’s a rather large interest rate and cost rise, which makes things considerably more difficult. In this case, renting could become the more affordable option. The interest rate increase is also causing the current housing market to drop. By renting for a year or two, you may score a cheaper rate and a better deal on a home. 

Renters can anticipate annual rent increases.

Rent rises can be a significant issue for retirees on a limited income. You had planned X dollars per month for rent, but suddenly it’s twice as much. This is a really large rise that can seriously disrupt a retirement plan.

Homeownership might provide greater control over future monthly expenses. If someone is planning to rent for an extended period and has the resources, locking in a fixed-rate mortgage is a better idea, adds Ungerott. You may pay more upfront but have a fixed payment that will not alter.

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