Not long ago, I checked out an apartment in a new building near my neighborhood, and fell a little bit in love with it. The place had all of my dream features: high ceilings, large windows, a great layout and the perfect location. The one downside? It was a rental unit. I’ve always figured on buying a condo with cash when I downsize. The idea of living without a mortgage seems liberating.
The upside of renting. But it turns out that buying rather than renting when you downsize is far from a no-brainer. For starters, renting is more flexible than owning—a major factor if you are downsizing from a house to an apartment or moving from one city to another. If you decide you hate your new digs, you can move again without a hassle. “Renting buys you time to confirm your choice,” says Michael Palmer, a certified financial planner in Raleigh, N.C.
Renting also allows you to keep a lid on housing expenses. True, rents go up, but rental prices have to stay competitive with the local real estate market, says Catherine Hawley, a certified financial planner in Monterey, Calif. By contrast, homeowners association fees can rise significantly based on the costs of maintaining and upgrading the property. Plus, repairs and maintenance for a condo are on your dime; for renters, they are someone else’s problem.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Isn’t paying rent like throwing money out the window? Even if you buy your condo outright, you still have to come up with property taxes and homeowners insurance. Meanwhile, the money you used to purchase the unit is tied up. “Short of selling your condo, the only way to access the equity is by paying a lender for the privilege,” says Dave Yeske, a certified financial planner in San Francisco. But if you rent and invest your money, you can use the earnings to defray the rent.
As for getting to deduct mortgage interest and property taxes on your tax return, you won’t have mortgage interest to deduct if you pay cash for your condo. If you do take out a mortgage, you may discover that such deductions don’t have as big an impact on your tax bill as they did during your peak earning years.
Don’t get me wrong: Owning a condo has real advantages. For one thing, the place is yours. You can rip up the carpeting and knock out walls as you like (within reason) and enjoy the satisfaction of ownership. You also enjoy whatever price appreciation the property gains over time, assuming you stay long enough for the appreciation to cover the closing costs (typically at least five years). If most of your income is derived from tax-deferred accounts, the tax deduction will come in handy, even if your income is smaller than it used to be.
Before you decide one way or the other, see how the numbers line up by going to one of the rent-versus-buy calculators available online. (I tried the New York Times calculator.) You fill in the variables, including what you’d expect to pay if you bought and how much you’d expect to earn on your investments if you banked the profits from the sale of your current home.
Based on the calculator’s analysis of my circumstances, I’d be better off buying a condo that lists for $350,000 (my optimum amount) than renting my dream apartment for $2,500 a month, which is what it goes for. That assumes I stay put for several years in the condo and that homeowners fees (and other variables) stay relatively static. Based on the numbers I crunched, the rent would have to be half of what it is for me to come out ahead financially.
Renting still makes sense if I find a more affordable apartment or want to keep my options open for a few years. It’s nice to know I’ll have both options when I start looking seriously for my next new home.
-
What to Expect From Bitcoin and Other Cryptocurrencies in 2025With help from Donald Trump, the cryptocurrency industry is expanding rapidly. Here's what to expect from bitcoin in 2025.
-
What's the Key to a Happy Retirement for a Couple?Retired couples spend lots of time together. Without the distractions of work and raising kids, miscommunication can cause trouble. Here's a way to avoid that.
-
The Problem With 401(k) Catch-Up Contributions for 2024Retirement Plans New rules governing certain 401(k) catch-up contributions caused confusion and raised concern.
-
Half of Mothers Have Little or No Retirement SavingsMother’s Day comes and goes, but many moms face future financial insecurity because they have little or no retirement savings.
-
Retirees: Cohousing is Growing. Is it Right for You?This model of housing is designed to increase interaction. For some retirees, this is a draw. But you should know the details.
-
Caregivers Share Their StoriesCaregiving Readers' own perspectives on the struggles and triumphs of caregiving.
-
Now You Can Own Bitcoin in 401(k)s. Should You?cryptocurrency Fidelity will begin allowing investors to put Bitcoin in their 401(k)s. But is this retirement vehicle the right place to hold crypto?
-
Start the Elder Care Conversationlong term care Many people don't have a plan set where an elderly parent will go. Do you?
-
The Stresses of Being a CaregiverCaregiving One study shows that caregiving takes a greater toll on retirees' mental health than on their finances.
-
Honey, We Need to Talk About MoneyWomen & Money Instead of focusing on the numbers, couples might have more success discussing their goals.
