It's one of the most difficult questions people face when they sell a house: is it better to rent or buy? Writing in the Washington Post, Michele Lerner looks at the issue and talks to a financial advisor:
"Many of our clients who are at or near retirement like the idea of downsizing and moving into the city or closer to the city, and they assume it will be less expensive than maintaining a large home," says Laly Kassa, managing director of financial planning at Chevy Chase Trust in Bethesda. "The reality is that it’s just as expensive to move closer to the city to an area that’s walkable and close to transit. Some are opting to buy, and some are opting to rent, but the decision is unique to each client."
Lerner is talking mostly to wealthier people (the first couple has a second home in Italy) but for others, the house may be their biggest asset, and selling it unlocks that equity. And while I do go on about getting out of the suburbs and into a walkable community, you don't have to move to the big city to get a taste of this; there are lots of university towns, for example, that are walkable, fun and affordable. And when you rent, you get to check them out without as big a commitment.
Jane Hodges of the Wall Street Journal notes that people with oversized houses and inadequate savings can do much better by selling and then renting. She writes:
Renting has both advantages and disadvantages for older consumers. On the plus side, renters typically enjoy a wider range of housing options, flexibility (a one-year lease is a short-term commitment) and the fact that building managers handle repairs, landscaping and snow shoveling.
The money question
Certainly that's how it worked out for my parents. After they sold their house, they moved into a popular building but found the apartment a bit small and moved after just a few years. Their next apartment was huge, and when my father died, mom called the landlord and moved to a smaller apartment a few floors down. It was a building from the '60s and had a terrible kitchen and no air conditioning, but the staff all knew her and watched out for her as she aged in place. With additional help in later years, she was able to stay in that building for 30 years.
Was it better for her to have rented all those years instead of owning? Probably, as she would not have seen the gain in value in her lifetime, and meanwhile her invested money did quite nicely and she was able to live on the income. You can't eat a condo, and as John Maynard Keynes noted, "In the long run we are all dead."
On the other hand, you can't "fritter away" a condo or house; the money is locked up and could appreciate a lot more. There may also be tax advantages. But as Americans know from the Great Recession, housing prices don't always go up, and they certainly don't go up evenly across the country. Some homeowners are still under water 10 years later.
Renting may make more sense than buying for boomers for a lot of reasons, but here are the best of them:
- It's more convenient: None of the usual homeowner worries about maintenance and roof repairs apply — the landlord does it.
- It's more flexible: A condo is a real commitment, whereas a lease is much less of a deal and can often be terminated with a penalty if you really want to get out of it.
- It can be cheaper depending on where you're moving. People also underestimate the costs and insecurities of condo living where there can be high operating costs, special assessments and changes in taxes.
- It might be easier at the next stage of your life. Things change, and if something happens and you have to move, it's easier to move out of a rental than to dump a condo in a hurry.
- You have money! Why not enjoy a bit of it instead of tying it all up in real estate?
Renting also offers some real opportunity to try out different parts of the city, the country or even the world for a couple of years, but buying pretty much ties you down. Just put all your stuff in one of Matt's storage lockers and hit the road. That might be the best investment of your time and money that you ever make.