Renting vs. Owning: Which Option Is Right for You?

Home ownership has long been considered a pillar of the American Dream – a sought-after goal with long-term financial benefits that renting simply doesn’t afford. That’s what many were told growing up, anyway. “Paying rent is like pouring money down the drain,” was the conventional wisdom passed down from our parents.

Boomers and older Gen Xers seem to have taken that message to heart and, more than any previous generation, are opting to remain in their current homes in retirement. An AARP survey found that nearly three-quarters of adults 50 and over want to stay in the same home as they age.

Whether that’s a wise financial move in or near retirement is a matter of considerable debate. Experts agree, however, that for some homeownership may not be a good investment. Instead of an asset, it can be a burdensome liability that drains retirement savings and limits lifestyle choices, they say.

For starters, there are the costs associated with homeownership beyond the monthly mortgage payment. These include:

• Big-ticket projects, like replacing a roof or heating system
• Regular maintenance, like lawn mowing and clogged drains
• Property taxes 
• Home insurance (although bundling homeowner’s insurance with auto insurance can help alleviate some of the financial burden)

And although the norm for past generations was to enter retirement with their mortgage paid off, that’s not always the case. After putting plans to upsize on hold during the Great Recession, many are still seeking their “dream home.” Indeed those that are 50+ carry more mortgage debt than their parents did. From 1992 to 2020, the median outstanding mortgage balance for this age group has grown from $48,743 to $178,688.

That financial obligation could be potentially overwhelming in the event of a job loss, major illness or other crisis. The level of risk, of course, depends on the situation and resources of individual retirees, but one thing is clear: Those who carry mortgage debt into retirement are more likely to have financial difficulties and limited choices.

For that reason, those 50+ should be focused on making their savings work as hard as possible for as long as possible, Eleanor Blayney, a consumer advocate at the Certified Financial Planner Board of Standards, told the Washington Post.

The question of whether renting is the right option for you boils down to what makes the most sense for you financially. Here are some factors to keep in mind while weighing the decision.

Renting

Although far from a panacea, renting offers distinct advantages. For one thing, the responsibility and expense of maintaining the property rests with your landlord, not you. So, when the faucet leaks or the water heater goes kaput, all you have to do is pick up the phone and alert the owner to the problem. And for a low monthly cost, a renter’s insurance policy can offer protection for your personal property, liability coverage and more. (Learn more about what rental insurance covers.)

Another benefit: While the equity you have in a home is considered an asset on paper, that “wealth” is of little use until you sell your home. Once you do sell, that money can be put in a savings account or other investment vehicle where it’ll be more readily accessible when you need it – for say, medical expenses or the river cruise in France you’ve long dreamed of taking.

Another potential perk: The cost of renting can sometimes be less than owning. This is particularly true in the early years of a mortgage when much of what a homeowner pays goes toward interest instead of equity. That makes renting a great option if you only plan to do it for a year or two. But the savings associated with renting tends to diminish over time and reverses in favor of owning within 10 years. This calculator can help you determine when the turning point would be for you.

Now for the drawbacks: Rents can go up over time and owners can sell out from under tenants, forcing them to end the lease and find another place to live. As a renter, you also forego many tax benefits afforded to homeowners. And stock and mutual fund investments can always decline in value while property values increase.

Owning

The most touted benefit of homeownership is the tax deductions. These write-offs include mortgage interest, mortgage points and real estate taxes. Other tax breaks afforded to homeowners include depreciation on a home-based office and credits for installing energy-saving upgrades, such as water heaters and heating systems. And when you sell your primary residence, you can make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any taxes on capital gains. 

Critics argue that the benefits of these tax breaks don’t offset the overall costs of buying and owning a home, which, besides a monthly mortgage payment, include a down payment, closing costs, lawyers’ fees, maintenance fees and where applicable, homeowner association fees.

Need help deciding? Trulia has a Rent vs. Buy Index, which features a calculator that can help you determine whether renting or buying is more expensive in your location.

One of the major risks associated with homeownership is that values can and do decline, sometimes in spectacular fashion. If the Great Recession taught us anything, it’s that. Boomers saw a drop of nearly $1 trillion in home value when the real estate market tanked, Patrick Simmons, director of strategic planning in Fannie Mae’s economic research group, told the Los Angeles Times.

Next Steps

those 50+ should ask themselves three questions when pondering which route to take, Blayney and another expert, Jeff Bucher, president of Citizen Advisory Group in Ohio, told the Washington Post.

• How long will I live there?
• What else could I be doing with the money?
• What social services will I need?

The five-year rule – that you’ll want to stay in the same location for at least five years – is a good one for this age group. Closing costs, realtor’s fees and moving expenses make homeownership an expensive proposition up front, say Blayney and Bucher, and it takes time to make that money back through appreciation.

As for what else you could be doing with the money, the pouring cash down the drain analogy associated with renting applies to younger homebuyers, Blayney said. Boomers have had decades to build wealth and should instead be thinking about the best way to deploy what they’ve accumulated, she said.

That might mean selling the family home, putting some of the proceeds into a brokerage account and renting an apartment, said Blayney. “You have the ability to begin to engineer your income. You have a portfolio now with lots of possibilities.”