Buy…Rent….or Stay?

May 11, 2011 — The sky is falling in Greece and Europe, the stock market went so crazy last week that blue chips went from $30/share to 1 cent in 15 minutes, the Gulf of Mexico continues to spout millions of gallons of crude oil – and amidst this encouraging backdrop you have to decide what to do about your retirement. You might be excused to be a bit uncertain about whether you should you buy…rent…or stay. This article will discuss some of the important factors you should consider in making your decision.

Buy?
Buying a place for retirement is a dream and a plan for many baby boomers. Here are some of the factors you might consider before you take the plunge, pro and con:
Cautions:
– Have you carefully researched where you want to live, spending time there to make sure that the environment is right for you? If you haven’t had more than a quick vacation to your new community, you might want to hold back until you have experienced what it is like to live there for a longer period.
– If you make a mistake and choose the wrong community or home you can always sell and buy another. But the closing expenses and sheer hassle factor will make that mistake a costly one.

– Have you met your new neighbors? These are the people that you will in all likelihood be rubbing shoulders or socializing with – is there sufficient variety (or homogeneity) for you to be happy?
– If there is a Home Owners Association HOA, or Community Association), what kind of shape is it in? Look out for lawsuits, inadequate sinking funds, high rates of foreclosures or arrears in association dues. These days more than ever the financial and legal health of the HOA is critical.
– Bummer, you just missed the $8000 tax credit for buying a home (it expired in April)

On the Pro Side
– Mortgage rates couldn’t really get any lower. Your ability to repay the mortgage will be scrutinized carefully, but if you succeed in getting one you will have a bargain for a long time.
– Even though the National Association of Realtors (NAR) reported that March 2010 home sales rose 5.3% and prices were up as well, there is a tremendous supply of homes and condos to choose from. Builders have significant inventory and many sellers have become more reasonable about their prices. You might never have more choices than in the next year.
– Related to the “choices” issue, buying now might let you capture a really excellent property at a reasonable price. If you wait, you might not be able to be as picky.
– Uncle Sam helps buyers fund their purchases with generous deductions for property taxes and interest payments. If you will rent your property for part of the year, you can usually get deductions for depreciation and many related expenses like utilities and maintenance.
– You will get peace of mind from knowing where you are going to live. Particularly if you are a snowbird, you won’t have to go through the hassle of finding a new rental every year, as well as avoiding some of the restrictions often thrown at renters (no pets, limited use of golf courses and other facilities, etc.).

Rent?
Cautions
– Renting is rarely permanent. You might have to find another rental at some point, and that means moving.
– If you are a snowbird, every year you will have to find a new rental, maybe not exactly where and when you want it.
– You won’t be able to decorate your home exactly like you want to. You might also face certain restrictions that owners don’t have (see above).
– If home prices start rising again and you don’t own one, you could get priced out of the market.

On the Pro Side
– In some markets the price to rent ratio, which tends to help identify when a housing market is overpriced, is very favorable to the renting option. In those places the cost of renting is more attractive than the cost of home ownership. Normally if the ratio is 18 or higher you should rent, a lower number suggests buying is the better option. (see Resources below)
– If there is a natural disaster, or your Home Owners Association or builder goes bankrupt – you just move out and leave the mess to your landlord!
– If home prices decline or don’t advance, your powder will be dry for future options.
– If you don’t like your house, your neighbors, the town, or the management – you can vote with your feet at the end of your lease.
– Renters can explore many different environments and communities without being tied down.
– When your lease ends, so do your worries.

Stay in Your Existing Home?
Cautions:
– If prices in your market continue to decline, your net worth and ability to sell will be negatively affected.
– If you live in multi-story home in the suburbs you might find it very difficult to remain there once you or your partner lose your ability to drive and negotiate stairs.
– If your climate or the environment isn’t so great, particularly in the winter, you could miss out on a lot of activities that would keep you healthy and engaged.
– Taxes, maintenance, and utility expenses could negatively affect your standard of living, particularly in you live in the midwest or northeast.
– If you stay too long where you are, you will probably never move. People in their 80’s and 90’s generally find it too hard to move, so for better or worse, they are trapped where they are.

On the Pro Side
– Given the uncertainty in the world and real estate markets, staying where you are represents stability and a known commodity
– Vs. renting, if housing prices resume their historical upward track you will have preserved your purchasing power once you sell your house.
– You might be able to use a reverse mortgage to tap your home equity and maintain your current style of living.
– If you like where you live and/or are close to family and friends, that could be a major source of happiness for you.

Bottom Line
Everyone has to make their own decision about what to do on the buy, rent, or stay question. Your personal preferences about climate, activities, environment, and proximity to friends and family will help you decide. The economics of the region/community you live in now and want to move to are major factors – are they headed up or down? Plus you have to figure in where you think the economy and the housing market are headed.

Our Bottom Line
Hindsight tells us that in most markets, the really smart people sold their homes in 2006 and started renting. We were wrong in 2007 and 2008 – the market could keep falling! In our opinion the market has changed in 2010. If your long term plan includes buying a place to live in retirement, this is a good time to be looking. Prime properties are plentiful, mortgage rates are low, and the economy appears to recovering. In the long term it won’t matter much if you miss the absolute bottom – what matters most is picking the right place to live for a happy retirement.

What Do You Think?
Use the comments section below to post your reactions and thoughts to this issue. What does your crystal ball tell you?

Additional Resources
2010: The Best Time to Buy a Home? (MoneyWatch)
Baby Boomers Face a Dilemma: Buy or Rent
How to Retire in Style and on a Budget
Should You Buy or Rent (Kiplingers)