The housing market is hot, and it’s a great time tosell your home. Still, if you’re thinking about renting your next one, consider the tradeoffs. Renting temporarily is fine if you want to try a new location or if you anticipate moving frequently early in retirement. But the longer you rent in retirement, the riskier it becomes. Buying a home usually makes more sense if you plan to stay put at least five to seven years—long enough to recoup the costs of buying and selling the property.
The temptation to rent now is understandable. In January, renting was cheaper than buying in 34 of the largest 50 U.S. cities, according to Realtor.com, where you’ll find sale and rental listings. In those cities, the median monthly rent of $1,727 was $261 less than the monthly mortgage payment of $1,988 for the median-priced home. Over the past 20 years, rent has increased an average of 3% annually, according to the Bureau of Labor Statistics.
The tax benefits of homeownership also aren’t what they used to be, particularly if you live in a high-cost area. Tax reform in 2017 reduced the amount of mortgage debt eligible for a mortgage interest deduction from $1 million to $750,000. The law applies to mortgage debt acquired after Dec. 15, 2017, and also caps the deduction of state and local property, sales and income taxes at $10,000. Because the standard deduction is higher, you may no longer itemize deductions anyway.
Although you won’t benefit from any home price appreciation as a renter, you may do as well or better long term if you invest the equity from the sale of your home in a diversified portfolio of stocks and bonds, says Wade Pfau, professor of retirement income at the American College of Financial Services. In fact, despite the recent run-up in home prices (10.4% in 2020, according to the S&P CoreLogic Case-Shiller Index), many retirees will be lucky if their home rises in value with inflation or exceeds it over the long term, he says, citing the research of economist Robert Shiller. If your neighborhood was hot when you bought, the greatest gains in value may be behind you.
That said, Lori Atwood, a financial planner in Washington, D.C., discourages clients who sell a home from renting in retirement. For one thing, you lose the flexibility of having an asset that you can both live in and tap for cash as needed, perhaps through a reverse mortgage. That’s particularly important as long-term care insurance becomes less affordable. If you need skilled care later in retirement, your home can be liquidated to cover the cost.
Renting also brings instability. “If the rent keeps going up or someone will throw you out because their cousin wants to move in, risk has come to the retiree, and that’s the last thing you want,” Atwood says. Rising rent could be a hard pill to swallow if your investment income doesn’t keep up with inflation or your rent increases faster than your retirement income.
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