Is It Better to Rent or Buy After Retirement?

Let’s start with a look at the pros and cons of owning and renting. Then we’ll explore a few cases in which one option or the other is a clear winner. After that, we’ll offer alternative investment types for those who find that renting after retirement is a better fit.

The Pros and Cons of Owning a Home in Retirement

The Benefits of Homeownership During Retirement

• Home Equity. Because real estate appreciates over time, homeowners can reasonably expect the value of their property to increase through the years. You (or your beneficiaries) will have a valuable asset that can likely be sold for a profit. Even if you don’t sell the home, you can tap into your equity through home equity loans or lines of credit if you ever need cash. 

• Stable Housing Costs. Mortgage payments can be more predictable than rent, particularly if you lock in a fixed-rate mortgage. This makes long-term budgeting easier and offers some protection from sudden housing cost increases.

• Freedom to Customize. Owning a home allows for personalization to suit your lifestyle and physical needs. This may be an important consideration as you age, particularly if you want to make modifications to accommodate limited mobility.

• Potential for Rental Income. House hacking is an option for homeowners who want to rent out space on their property for passive income. 

• Tax Advantages. Homeowners can deduct certain expenses, including property taxes and mortgage interest, from their taxable income. This can be a big benefit, particularly if your source of income in retirement is taxable (such as withdrawals from 401(k)s, traditional IRAs, or passive income investments). 

• Emotional Security. Owning a home can provide a sense of stability and emotional security, knowing it's a permanent place where you've likely made many memories.

The Downside of Homeownership in Retirement

• Maintenance and Upkeep. Homes require regular maintenance, which can be physically and financially demanding. As you age, you might be able to do less of the work yourself, which could mean increasing your maintenance budget substantially to hire professionals. Additionally, the older the home gets, the more likely it is to have unexpected maintenance issues. Appliances may need to be replaced, heaters may need to be repaired, etc. These unexpected repair and replacement costs can severely impact homeowners on a fixed income. 

• Less Flexibility. Selling a home is substantially more cumbersome than simply ending a rental agreement. The illiquidity of direct property ownership can make it difficult to change your living arrangements if your needs change.

• Property Taxes and Insurance. Homeowners are responsible for property taxes and home insurance, which can be substantial. While some states, like California, have property tax caps in place to prevent excessive increases, other states offer no such protection. 

• Large Upfront Cost. Purchasing a home requires a significant initial investment. In addition to the down payments, closing costs, and moving expenses, you may have renovations or modifications that need to be made to the new home. Furthermore, this money is now tied up in the house, and unavailable for other investment opportunities that could potentially provide better returns. 

• Potential Challenges for Your Family/Beneficiaries. If you are unable to care for your home, the job may fall to your family. Additionally, there could be issues if you wish to leave your home to a beneficiary who doesn’t want to keep the house. In the best-case scenario, your beneficiary would need to deal with the sale of the property. Worst case…your survivors fight over possession of the inherited home, creating animosity in the family.  

The Pros and Cons of Renting During Retirement

The Benefits of Renting During Retirement

• Flexibility. Renting allows more flexibility to move as needed. If you ever want to live closer to family, relocate to a better climate, or move into a retirement community, you only need to terminate your lease. No lengthy, expensive home sale is necessary. 

• Far Less Responsibility for Maintenance. Landlords typically handle property maintenance and repairs, reducing the physical and financial burden on the renter.

• Minimal Initial Investment. Renting doesn't require the large initial investment that buying a home does. You’ll just need to leave a deposit, which can be refunded upon move-out, so long as the property is returned in good condition. 

• Potentially Lower Monthly Costs. As home prices have increased, it’s now more affordable in most markets to rent than to buy. In Los Angeles, for example, 0% of the housing inventory is more affordable to buy than rent.

• Opportunity to Invest Elsewhere. Money that’s not tied up in a house can be invested in other, potentially more profitable ventures. For example, rather than buying a home in retirement, you could invest in real estate rentals that generate passive income. This income could help fund your lifestyle in retirement.

• No End-of-Life Hassle. Your heirs/beneficiaries won’t have to worry about maintaining, fighting over, or disposing of a house. 

The Downside of Renting in Retirement

• No Equity Build-Up. Rent payments do not contribute to building equity. 

• Potential for Rent Increases. As a renter, you are subjected to the uncertainties of the rental market. If you’re not in a rent-controlled area, rates can jump substantially with little notice.

• Less Stability. The landlord might not offer the option to renew your lease if they are planning to sell the property or move in themselves.

• Limited Personalization. Renting typically limits how much you can modify or renovate the property to suit your needs and tastes.

• No Tax Benefits. Renters don't get to claim the tax deductions associated with homeownership.

Is It Better to Rent or Buy After Retirement?

When It Makes Sense to Buy During Retirement

• You live in an area with high potential for substantial rental rate increases. Retirees on a fixed income may benefit from the stability of fixed-rate mortgage payments rather than subjecting themselves to the whims of the rental market.

• You trust your beneficiaries to handle the property appropriately. If you know your beneficiaries will benefit from inheriting the property, and it will not cause a rift among family members, you might be comfortable buying a home after retirement. 

• You are reasonably confident that this new space will serve you long-term. Of course nothing in life is guaranteed. But if you are fairly sure this next move will be a long-term home, you might prefer to buy rather than rent during retirement. 

When It Makes Sense to Rent During Retirement

• Your future is uncertain. If you might move again in just a few years, you may prefer the flexibility of renting. 

• Interest rates are high. Interest rates heavily impact real estate investments. Since most mortgage loans see the majority of your monthly payment allocated to interest rather than principal in the early years, it can be harder to break even when you’re ready to sell. 

• You have protection from rent increases. If you are in a rent-controlled community, for example, you may wish to continue renting through retirement. 

• You have concerns about leaving the property to a beneficiary. Many older homeowners have concerns about what happens to the property when they are gone. It may be in the best interest of your family to liquidate real estate assets and rent during your golden years. 

How to Invest in Real Estate Without Buying a Home

The Bottom Line