- Things to consider
- Expectations after taxes
- Risks to Consider
- An investment opportunity?
- Maintenance risk
- Payouts and liquidity
- The conclusion
Where to live is one of the biggest decisions retirees face. For many people approaching retirement, the decision to keep the family at home, downsize to a smaller house or condo, or relieve themselves of the stress and expenses that can come along with homeownership is a difficult one. (See: The Hidden Costs of Homeownership .) Here, we give you the points you should weigh to make this decision for yourself.
Things to consider
Keeping a few simple ideas in mind can simplify the decision between renting and homeownership. While this is an important choice for any retiree, it is best to avoid the details of specific ownership and rental options and examine this issue from a big picture perspective. Keep the following points in mind when considering this decision:
- What is your budget for renting or owning, excluding taxes?
- Look at a house or condo as a potential investment opportunity or simply as another living expense?
- Have you thought about the risks associated with ownership of unexpected costs, and can your budget tolerate them?
To begin, the first step in analyzing ownership versus renting is to determine how much money you want to spend after taxes. Since mortgage interest and property taxes on a primary residence are tax deductible, it is important to know the after-tax costs. (For more, read: tax deductions on mortgage interest .) Fortunately, the math is very simple and is explained in Figure 1, which arbitrarily assumes an after-tax budget of $2,000 for mortgage interest, taxes, and homeowners insurance or for rental costs.
Since rental costs are not tax deductible, no calculations are required. However, taxes complicate the situation for property in which you can spend well over $2, 000 each month but end up paying only $2.000 when you receive your tax refund. Essentially, all you have to do is determine your marginal tax bracket, subtract that percentage from Figure 1, and divide your budget by that amount (see below).
Figure 1 shows that if your budget has a net after-tax expense of 2.000 $ and your marginal tax rate is 20%, you 2.Have $500 per year to spend on mortgage interest and real estate. Taxes. Remember that you need to feed the input tax until tax refund season. Therefore, your cash flow situation must also be considered.
Risks to consider
Obviously, home ownership has a distinct advantage in that you can theoretically get more for your money. However, there is no free lunch, as homeownership also comes with significant financial risks. Such issues as market value fluctuations, expected/unexpected maintenance expenses and insurance deductibles can add huge costs beyond rent.Nonetheless, once you've done the math above, just go for homes, mortgages and rental properties that fit your budget. And don't forget to plan for inflation. Rents, taxes and insurance costs increase over time.
An investment opportunity?
Although residential real estate and condominiums can be good investment opportunities, these assets should not be examined solely from this standpoint. The fact is, housing is an unavoidable cost of living. From a conservative perspective, your home should be considered a living expense as opposed to an investment asset. This is because fixed assets should not be about finding another place to live to provide liquidity. Therefore, from a retiree's perspective, it would be best to ignore the investment edge in your thought process. It will distract you from the real goal of planning appropriately for your housing costs in retirement.
"One of the biggest myths about homeownership is that it is an investment. It's not.", Says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass." Owning a home you live in is an expense, not an investment. An investment is one that generates cash flow. Sure, there are some benefits to owning a home, but when you factor in the cost, large amounts of capital, the illiquidity of the home, and the fact that home prices don't always go up, ties it up for a much less attractive 'investment. "
Nonetheless, a general rule is very simple when considering your home as an investment: Buy low and sell high. This means buying and selling real estate opportunistically.
Keep in mind, however, that in some ways, renting can be viewed as the economic equivalent of shortening a stock. For example, if you believe housing prices are lower, you would rent a home, wait for prices to drop, and later buy a home. This strategy benefits from saving money at lower housing costs. If you are wrong about the direction of housing prices and end up paying a higher cost for homeownership when you buy, it is similar to paying a higher price for a stock to cover your short position.
This is the main thing a retiree should be concerned about when using a primary residence as an investment. By selling your home, you take the chance of being priced out of the market when prices rise rather than fall. This should be a big issue if you have a fixed budget and enjoy owning your own home or apartment rather than doing so with a landlord.
Another important issue is the maintenance risk associated with ownership. This is important because renting is the same as buying an insurance policy against maintenance. This means that renters are not liable for regular maintenance costs, equipment failures, or catastrophic events such as a tree falling at home or being hit by a storm. The beauty of renting is that the landlord has to worry about the unexpected financial costs of ownership.(Read: Becoming a landlord: More trouble than it's worth? )
"I prefer to rent for many reasons. High [home] prices with weak investment potential are the first reason. The second reason is the underestimated monthly cost of ownership. Taxes, interest payments, insurance, water, electricity, sprinkler systems, planned and unplanned maintenance and all the rest add up to substantial monthly payments that don't go toward building equity. Renting is often just more cost effective", Max Osbon, a partner with Osbon Capital Management in Boston, Mass.
Payoffs and liquidity
Other financial benefits of being a tenant are that you don't have to worry about. On market conditions if you move and there is no possibility of an investment loss. In addition, as a tenant, you do not have to worry about liquidity. Selling a home can take a long time. It also involves a lot of paperwork. In addition, most real estate agencies charge a commission. It can definitely pay to weather this mess when it's time to move on.
Additionally, retirees often live solely on annuities such as Social Security or a corporate plan. However, they do not always have large sums of net assets. If you don't have sufficient assets on the sidelines to pay for unexpected expenses, the normal cost of owning a home could be ruinous. On the other hand, if you have enough assets on the sidelines to tolerate the unexpected costs of ownership, then maintenance risks really shouldn't be a big issue in your considerations.
In summary, you can decide whether or not to own a home in retirement by examining several key points:
- Decide if you want to make an investment or just budget for expenses. of life.
- Figure out what you want to spend after taxes, and do the math to set your budget for leasing and ownership.
- Seriously consider how much risk you want to take on. Do you want to worry about market prices? Can you afford the financial risks of maintenance?
- Remember that there is a direct relationship between the size of your liquid assets and your ability to tolerate the financial risks associated with ownership.
Unfortunately, these decisions have little to do with hard facts and more to do with soul searching. Retirement should be carefree and enjoyable; Review your situation and assume only the costs and risks that will allow you to sleep well at night.