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Should You Rent or Buy a Home When Downsizing?
Factors to consider when deciding what to do

Consider this scenario: You are recent retirees with an empty nest and a five-bedroom home that now seems like a waste of space and money. The simple solution is to downsize, but should you rent or buy a new, smaller and more economical place? There are many factors to consider when making this decision, including monetary facts, financial expectations and emotional influences.


Financial details and expectations


One important financial aspect to consider is the comparative costs of mortgage prices versus yearly rents for similar properties in a certain desired community. At the same time, you need to make some assumptions about a property and your fiscal future. Consider annual rent hikes and the costs of home maintenance, homeowners and renters insurance, property taxes, and investment growth.


Furthermore, estimate your cash-flow needs during retirement.


“Renting will save you a lot of capital and lower your expenses,” said Rich Arzaga, CEO of Cornerstone Wealth Management, in an interview with Kiplinger’s. Because renters have no money tied up in a house, they can add the extra capital from the sale of their original home to their investments, leading to more overall liquidity.


Darrow Kirkpatrick, author of the popular investment blog “Can I Retire Yet?” — and an early retiree — refers to this as the “opportunity cost” of buying a home.


“He figured he could earn more on his investments than he would get in house appreciation, which has run an average of 5.4 percent a year since 1968, according to the National Association of Realtors. Meanwhile, the annualized return for Standard & Poor’s 500 stock index was 10 percent during that period,” explains Susan B. Garland, a writer for Kiplinger’s, of Kirkpatrick’s theory.


Nonfinancial factors


Emotional issues and opinions will greatly influence your decision as well. Would you prefer to have the freedom to fix up your home exactly how you want it, or would you rather have the peace of mind to not have any maintenance responsibilities?


Also consider your desired lifestyle in retirement. For example, how long do you plan on staying in this new place? If you don’t want to be tied down, then renting is a superior option, especially because real estate taxes, broker fees and other expenses would be rendered useless if you kept selling multiple homes after owning each for just a few years.


Additionally, think about age-related wants and needs. How soon do you expect to be moving into an assisted living facility, if at all? Keep in mind that this may become a reality for you sooner than planned, but also realize that such establishments offer a host of amenities. 


Arzaga ran some calculations for Garland’s Kiplinger report, using typical demographics and average numbers. The analysis found that renting does indeed top buying in the short run. That is, for many renting is an overall better financial option in the first 10 or so years after downsizing. On the other hand, after 10 years, a mortgage is fiscally more responsible.


It all comes down to the answers you and your partner give to the questions posed. No two situations are exactly the same, so stop by and let us help you make the right decision.


Published by North Shore Trust and Savings
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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.

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