Question:
We’re renters in an expensive market who will be retiring and relocating soon. (We haven’t decided where.) We’re on track to realize 100% of our pre-retirement income.
Should we rent or buy our next home?
Answer:
I’m sure it comes as no surprise when I say, “It depends.”
Obviously, buying versus renting, and where to live, are key retirement questions.
They are also difficult to answer because not only is everyone’s situation unique, and not only are there numerous variables, for many people, there’s an undeniable emotional appeal to owning a home.
The goal for you is to clarify the decision by considering a combination of practical concerns (i.e. location, housing costs, taxes), along with what it is you most want from the experience.
Before we get too specific, let’s review some general pros and cons of each.
Some advantages of owning are:
- It’s easier to get credit in an emergency.
- Homes are typically good investments.
- Fixed mortgages mean a steady monthly payment with no increases.
Some disadvantages of owning are:
- The risk of a housing crash.
- The cost of upkeep and emergencies.
- Property taxes and insurance costs that will never go away.
Some upsides of renting are:
- Lots of flexibility.
- Your total monthly housing expense is merely the amount of your rent.
- In mid-range and high-priced markets it’s typically much less expensive.
Some downsides of renting are.
- Periodic rent increases.
- Cantankerous landlords with no motivation to fix anything.
- No equity for your expenditure.
Costs and Other Considerations
The next thing to consider is the price of housing. This largely depends on two key factors: Where you want to live (because housing prices vary wildly by city and region), and how much after-tax money you’ll have available to spend on housing (which is also partly based on each region’s respective state and property tax rates).
First, where do you want to live? For an idea of how disparate prices are:
- The median home price in San Jose is around $980,300.00
- The median rental price in San Jose is roughly $3,300.00 [1]
Conversely:
- The median value of a home in Cleveland is roughly $64,600
- The median rental price in Cleveland is just $800 a month. [2]
Next, let’s say you’ve done your homework, and you’re considering moving to an as-yet-to-be-determined town (in a mid-priced market with a median price of a home of about $225,000), in any one of three states that you particularly like (say, State A, B or C).
Let’s also say that the intangibles of State A, B and C markets, the weather, beauty, services, shopping, culture, recreation, and the close proximity to family (or whatever “quality of life” components are most important to you), are all equally desirable.
So, all things being equal, and since from a financial, tax and expense perspective, owning a home is simply more complex, before you decide between renting and buying you’ll want to assess the following:
- What are the state’s property taxes? (Hawaii’s are the lowest at 0.27%, New Jersey’s are highest at 2.4% [3])
- What are the state’s income tax rates? (Seven states have no income tax, while California’s can be 10%, or more. [4])
- How do the rents and home prices compare in areas A, B and C? (Ohio’s, Michigan’s and Wyoming’s are low, Hawaii’s and California’s are high. [5])
- And, if you really want to get granular, what are the local sales taxes for each location? (Virginia’s and Wyoming’s are low, California’s and New York’s are high.) [6]
Just by comparing the answers to the questions above, you may already be able to eliminate one or more of your potential locations. And, best of all, once you’ve done the research, you may be fortunate enough to fall in love with a house located in a town where not only are home prices affordable but in a state that just happens to have both zero (or low) income tax and reasonable property tax rates.
Wouldn’t that be nice?
Still More Considerations
Once you figure out where you want to live, then, based on how the local taxes and costs will impact you, and, based on your house price point, you can calculate your after-tax income and decide which is best: Buying or renting.
There are, obviously, other important questions you’ll want to ask yourself (and your advisor). For instance, for those who might want to purchase a home, how would you answer the following questions?
- Is it an investment (or just another expense)?
- Can you easily afford the cost of repairs, insurance and upkeep?
If the answer to both of the above is yes, then chock those up in favor of buying.
This is also important because mortgage interest and property taxes are typically deductible, which means you actually get some of your expenses back, which lowers the cost of owning. (Whereas renting is typically a one-way, set expense.)
Conclusion
To make the best decision for you, you’ll want to:
- Make a list of your personal pros and cons for buying.
- Make a list of your pros and cons for renting.
- Identify a few places you want to live.
- Price home values and local rents.
- Figure out your after-tax income (based on both the state income and property taxes).
- Figure out what you can afford.
I have one more piece of advice on this topic, and that is, whenever possible, I strongly encourage clients to retire mortgage (or rent) free.
If you can afford to buy a house, and still have plenty of money left over for emergencies, while still achieving 100% of your preretirement income, I’d probably advise you to buy.
Typically, you get more for your money when you buy, and you’ll have a nice asset to pass along to your heirs.
However, if keeping costs low and cash flow high are your primary considerations (which I certainly endorse), and you’re not looking at purchasing a home as an investment, then renting in your preferred area is not only going to be cheaper month-to-month, it may well be the best decision for you.
[1] https://www.zillow.com/home-values/
[2] https://www.zillow.com/home-values/
[3] https://taxfoundation.org/how-high-are-property-taxes-your-state/
[4] https://taxfoundation.org/state-and-local-sales-tax-rates-in-2017/
[5] https://247wallst.com/special-report/2017/05/15/what-a-typical-home-costs-in-every-state/4/
[6] https://taxfoundation.org/state-and-local-sales-tax-rates-in-2017/
