Should You Rent or Buy Your Next Home in Retirement?

A welcome mat, surrounded by boxes and shoes, says home sweet home.

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The housing market is hot, and it’s a great time to sell your home. Still, if you’re thinking about renting your next one, consider the tradeoffs. Renting temporarily is fine if you want to try a new location or if you anticipate moving frequently early in retirement. But the longer you rent in retirement, the riskier it becomes. Buying a home usually makes more sense if you plan to stay put at least five to seven years—long enough to recoup the costs of buying and selling the property.

The temptation to rent now is understandable. In January, renting was cheaper than buying in 34 of the largest 50 U.S. cities, according to Realtor.com, where you’ll find sale and rental listings. In those cities, the median monthly rent of $1,727 was $261 less than the monthly mortgage payment of $1,988 for the median-priced home. Over the past 20 years, rent has increased an average of 3% annually, according to the Bureau of Labor Statistics.

The tax benefits of homeownership also aren’t what they used to be, particularly if you live in a high-cost area. Tax reform in 2017 reduced the amount of mortgage debt eligible for a mortgage interest deduction from $1 million to $750,000. The law applies to mortgage debt acquired after Dec. 15, 2017, and also caps the deduction of state and local property, sales and income taxes at $10,000. Because the standard deduction is higher, you may no longer itemize deductions anyway.

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Planning to Sell Your Home in Retirement? Downsize Costs Along With Space

Although you won’t benefit from any home price appreciation as a renter, you may do as well or better long term if you invest the equity from the sale of your home in a diversified portfolio of stocks and bonds, says Wade Pfau, professor of retirement income at the American College of Financial Services. In fact, despite the recent run-up in home prices (10.4% in 2020, according to the S&P CoreLogic Case-Shiller Index), many retirees will be lucky if their home rises in value with inflation or exceeds it over the long term, he says, citing the research of economist Robert Shiller. If your neighborhood was hot when you bought, the greatest gains in value may be behind you.

That said, Lori Atwood, a financial planner in Washington, D.C., discourages clients who sell a home from renting in retirement. For one thing, you lose the flexibility of having an asset that you can both live in and tap for cash as needed, perhaps through a reverse mortgage. That’s particularly important as long-term care insurance becomes less affordable. If you need skilled care later in retirement, your home can be liquidated to cover the cost.

Renting also brings instability. “If the rent keeps going up or someone will throw you out because their cousin wants to move in, risk has come to the retiree, and that’s the last thing you want,” Atwood says. Rising rent could be a hard pill to swallow if your investment income doesn’t keep up with inflation or your rent increases faster than your retirement income.

Atwood encourages clients who sell a home to buy their next one for cash so they will be housing secure, with neither a mortgage nor a rent payment. “If you’re leasing a property, your stability lasts only until the end of your lease,” says Scott Abernathy, president of the National Association of Residential Property Managers. If landlords want to reoccupy the home or sell it and cash out their equity, they will refuse to renew your lease. You could be forced to move sooner than you would like and scramble to find someplace else, perhaps at a significantly higher rent. And moving becomes more difficult and disruptive with age.

Meanwhile, if you choose to break a lease early, it will cost you. Your lease could require you to fork over two months of rent, sacrifice your security deposit or cover the costs until a new tenant is found.

Not having the responsibility of home maintenance is another double-edged sword. While most home maintenance, such as repairing a leaky roof or replacing a malfunctioning water heater, is the landlord’s responsibility, you could get a landlord or property manager who is slow to respond or simply doesn’t care. A responsible landlord may be more attentive but also could balk at letting you add features to facilitate aging in place.

Tap Home Equity for Extra Income

Esswein joined Kiplinger in May 1984 as director of special publications and managing editor of Kiplinger Books. In 2004, she began covering real estate for Kiplinger's Personal Finance, writing about the housing market, buying and selling a home, getting a mortgage, and home improvement. Prior to joining Kiplinger, Esswein wrote and edited for Empire Sports, a monthly magazine covering sports and recreation in upstate New York. She holds a BA degree from Gustavus Adolphus College, in St. Peter, Minn., and an MA in magazine journalism from the S.I. Newhouse School at Syracuse University.