Retirement’s so close you can taste the salt of a margarita and feel the breeze of the ocean on your skin. All the excitement has you making plans you never dreamed possible—the stack of unread books on your nightstand and that long, ambitious bucket list are calling your name. You wonder if some of the ideas running through your head are too crazy to entertain, like…
“Should I sell my house and rent when I retire?”
You think of the freedom. The amenities. The idea of putting your hedge trimmer and snow blower away for the last time. And, although you’ve been a homeowner for decades, you just might be OK with never having a mortgage again.
There are, of course, the practical considerations—the kids are grown and flown, you start to realize that the “forever” home where you raised your family isn’t quite right anymore. You love your house of 30 years but it comes with too many stairs, and too much maintenance. You know you’ll be moving at some point to cut back on space and the demands on your time and body, one way or another.
But selling your house to rent when you retire is a major life upheaval with inherent risks to your financial future. Before you wistfully lock into an iron-clad lease, review the benefits and drawbacks of this decision carefully, and trust this guidance from top real estate professionals who offer an objective, informed perspective on both sides of the aisle.
You’re Wondering: ‘Should I Sell My House and Rent When I Retire?’
Get a Clear Understanding of Your Financial Reality
A recent study by the National Association of Realtors found that around 54% of home sellers are over the age of 52.
And those sellers aged 52+ are typically buying smaller homes. Why? Because sometimes it’s a smart idea to invest your home sale profits in a new property.
However, downsizing doesn’t necessarily mean you need to buy another home. For some retirees, it’s smarter to sell and rent instead. There are plenty of benefits to renting, but there are downsides, too. (More on that later.)
To figure out which option is best for you, it all comes down to running the numbers. For starters, you’ll need an idea of how much money you’ll need to comfortably retire. The experts at AARP advise saving around 10 to 12% of your current income.
That’s a lot of money, but luckily everyone’s retirement needs are different. Rather than getting intimidated by how much income you’ll need, think about it in terms of what income you’ll have from your current assets. That’ll give you an idea of what kind of retirement lifestyle you can afford.
Begin by looking at how much you still owe on your home compared with how much it’s currently worth. For that you’ll need the help of a top-notch real estate agent with experience in retirement planning—because your home may be worth more (or less) than you think.
According to Nile Lundgren, a top New York agent and Bloomberg TV commentator, who was named Executive of the Month by the New York Real Estate Journal:
“It’s really important to understand where the market is in comparison to what your expectations are. It all depends on timing. If you sell too soon, you could be missing out on more appreciation. Let’s say your house is in a rapidly gentrifying area; if you hold on for another two years, then you might increase your value by 10%. But that could be speculation. You could be leaving money on the table.”
Wile there are no guarantees, knowing how much equity you have in your home is an important early step in retirement planning. Factor that in with other retirement funds (pension, social security, retirement accounts, etc.), and you’ll know where you stand financially. Once you know that, you can tackle the decision of whether to buy or rent.
The Case for Selling Your Home to Fund Your Retirement
Whether you plan to spend your golden years traveling the world or settling into a cozy cottage in some sunny southern state, you’ll need funds to fulfill your retirement dreams. Cashing out on your current home’s equity may just be the best way to pay for it.
According to Forbes, “The average retiring American has roughly twice as much value in home equity ($200,000) as they do in their other savings.”
A house is a fantastic appreciating asset to have, but it’s not exactly liquid. While your house may be increasing in value, it’s not providing you with monthly income—unlike retirement accounts that pay out dividends. In fact, it may be costing you more than you realize.
Financial experts note that some retired homeowners forget to factor house-related expenses (HOA fees, maintenance, utilities, unexpected repairs, etc.) into their budgeting plan. Simply put, if you don’t sell your home after retirement, you’ll be spending more in expenses than you need to—all while sidelining your most valuable asset.
Selling your home to pull out the equity means you can put your best asset to work for you—especially if you put a good portion of the home sale proceeds into investment opportunities, like dividend-paying stocks or annuities. Invested wisely, those dividends can cover your rent and monthly expenses for years to come.
The Perks of Renting: Living the Low-Maintenance Lifestyle
As a renter, you’re no longer tied to a house. This means you’re free to travel and test out potential retirement locales through short term leases. You’re also free from the burden of home maintenance.
Lundgren says, “When you rent, you’re not responsible for things. You can be in a community where there is an on-site property manager. So if there’s a leak in the kitchen, it’s just a matter of contacting the manager and then it’s their obligation under the lease terms to rectify any problems.”
Renting also offers you some flexibility in housing styles—whether it’s a townhome, single-family single story, or apartment that you’re eyeing. You can find places to rent that fit all of these different property types, just make sure that if you go for a house, it comes with an HOA or professional service (if that low-maintenance lifestyle is important to you.)
Finally, while selling is a good way to fund the fulfilling of your fantasy bucket list, some might argue that you’re doing so at the expense of having an tangible asset to pass down to your children or heirs.
This isn’t necessarily a bad thing.
Unless your children are willing to move into your home for at least two years after inheriting it, they’ll be stuck paying a hefty capital gains tax. However, if you sell the property within your lifetime, according to the IRS, you’ll likely qualify to exclude up to $250,000 (or up to $500,000 on joint spousal filings) of the home sale price from your income.
Unfortunately, there is a downside to selling your home and renting when you retire.
Selling and Renting Means You’ll No Longer Own an Appreciating Asset
When you’re paying off a mortgage, you’re investing the bulk of your monthly housing costs into an asset that you own. When you rent, all of that money goes into someone else’s pocket. That’s why a number of retirees decide to buy rather than rent when downsizing.
If you sell without investing in another property, you’re losing your best “In Case of Emergency” asset. As long as your home is worth significantly more than you owe on your mortgage, that equity is a safety net to cover unexpected expenses like home repairs and medical care.
When you rent, you’re essentially spending down your home’s equity to finance in your twilight years. However, sometimes renting is the most cost effective way to go. In some regions, it’s actually cheaper to rent—at least in the short term.
According to hypothetical retirement analysis conducted by Kiplinger, a leader in personal finance news and business forecasting:
“Renting tops buying in the short run. The analysis showed that renting was a better financial option than buying for the first ten or so years after downsizing. Buying with a mortgage is the better option generally after 10 years. In year 11, the couple who bought with the mortgage had more in total assets than the renter—and the gap widened as the years went by.”
It’s also important to look at how homeownership impacts your Social Security benefits. True, maximum benefits are available whether you rent or own. What really matters is your income. If you pull equity out and invest it, those dividends may increase your income which may in turn reduce your benefits.
Buying may be the smarter play in the long run, but it does come with obligations.
Unless you can afford to buy your smaller retirement home outright, buying means signing on to another lengthy mortgage. However, sometimes taking on a mortgage isn’t a bad idea even if you can afford to pay off the property.
Homebuyers with good credit can take advantage of low mortgage rates which are currently between 4-5%. Then you’re free to invest the rest of your equity into low-risk investments that pay out monthly dividends that will cover your mortgage and then some.
Consider Out-of-the-Box Alternatives for Your Dream Retirement
There are a variety of ways to modify the “sell and rent” scenario to fit your retirement needs.
For example, you might decide to travel with the tax-free equity and use the remainder to finance the purchase a retirement home. Then, while you’re touring the world, you can temporarily lease the property to cover the mortgage.
If your current mortgage is fully paid off, you may even skip selling. With the help of an agent who also does leasing and basic property management, you can find tenants to rent your existing home at an amount that will cover living expenses in a retirement community.
As you’re deliberating “Should I sell my house and rent when I retire?”, just remember to weigh the impact your decision will have on all aspects of your life and financial situation, including your monthly income and your benefits. With the right strategy, your home equity can help you achieve a relaxing, fully-funded retirement.
Article Image Source: (Lightspring/ Shutterstock)
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