Many retirees figure on buying a condo with cash when they downsize. The idea of living without a mortgage seems liberating.
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. If you decide you hate your new digs, you can move again without a hassle.
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.
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.
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.
If you pay cash for your condo, you won’t have mortgage interest to deduct. 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.
Owning a condo has real advantages. You can rip up the carpeting and paint walls as you like 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).
Before you decide one way or the other, see how the numbers line up by using a rent-versus-buy 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.
Renting makes sense if you find an affordable apartment or want to keep your options open for a few years.
Kipplinger’s Personal Finance