Faced with the rising cost of living, many American retirees are looking to control one of the most fundamental expenses: housing.
Since the pandemic, the cost of housing has remained stubbornly high. According to a recent report , home affordability slipped further in January, as rising prices raised the income needed for a mortgage in 12 of 13 major markets.
Moving is not easy at the best of times, but for retirees, deciding whether to rent or own their home will have a long-term impact on their finances and their lifestyle. To help clarify whether renting or owning is your best option, retirement author and YouTube host Geoff Schmidt advises following what he calls the 5x5x5 rule.
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About the 5x5x5 formula
The 5x5x5 rule is a way to gain clarity on your decision to move by breaking down the pros and cons of renting versus owning both short- and long-term. Most importantly, retirees need to consider where they’ll be — not just geographically speaking — 10 years down the road. Here’s a breakdown of each of 'five' in the 5x5x5 rule.
5 pros of ownership
The first step in deciding if you want to buy a new home as a retiree is to think about the five big perks of having your own property. For retirees, the pros of owning a home allow you to:
- Build equity in your home : Each mortgage payment you make brings you closer to owning your house free and clear with no payments. If you can buy a new home or condo outright by selling your current home, you can still build equity in your new dwelling over time.
- Predictability : If you have a fixed-rate mortgage, your mortgage payments will remain consistent for years and you don't have to worry about a landlord ever making you move.
- Tax benefits : While mortgage interest and property taxes are not tax-deductible on a principle residence, you could find tax deductions if you use a portion of your home for a home-based business or to rent out as short-term accommodation or to a long-term tenant.
- Customization You aren't required to get a landlord's approval to make alterations and enhancements to your property.
- Home appreciation Homes typically appreciate in value over time, allowing you to boost your net worth through property ownership.
5 pros of renting
Leasing comes with five notable advantages, especially beneficial for retired individuals seeking more flexibility to explore and relocate—possibly nationwide or overseas. These benefits include:
- Extreme flexibility You can vacate your property after providing notice and head anywhere you please far more readily compared to dealing with an illiquid home that needs selling beforehand.
- Lower upfront costs You only need to pay the first and last month’s rent plus a security deposit to move into a rental, rather than making a substantial down payment like you would for purchasing a home.
- No maintenance concerns If something gets damaged, your landlord has to cover both the repair costs and the expenses for actually fixing it. There’s no need for you to set aside money specifically for maintenance emergencies.
- Predictable expenses During your lease period, your monthly housing expenses, which include utilities, will stay the same, regardless of increases in energy prices, for instance.
- Lack of worry If you live in a rented apartment, you don’t have to worry about shoveling snow, cutting grass, or handling other aspects of exterior maintenance.
5 factors to consider when deciding between renting or buying
The final step of the 5x5x5 rule involves taking into account particular factors that impact you directly. These encompass:
- Financial stability When evaluating your present and anticipated Canada Pension Plan (CPP) benefits along with your retirement income, would leasing property prove to be more financially viable over time compared to purchasing one?
- Lifestyle preferences Consider what constitutes a good quality of life for you and what truly matters. It could be prioritizing proximity to family members. Alternatively, maybe having convenient access to facilities such as healthcare services and recreational activities is important to you. Are you leaning towards stability or adaptability? Out of purchasing versus leasing, which one aligns better with your preferences?
- Current and future health : Are you in a position to maintain your home and does it have aging-in-place options?
- Estate planning : Do you want to have a home to leave as an asset to your loved ones?
- Market conditions : Is it a good time to buy a property? What do you think will be happening in the real estate market in the next decade?
By asking yourself these detailed questions about your own personal financial goals and lifestyle preferences, it will be easier to decide whether to own or rent now and in the long term.
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This article Could Canadian seniors opt for owning or renting their house? Apply this straightforward '5x5x5 guideline' to determine which might be better. originally appeared on Money.ca
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The content of this article serves solely as information and must not be interpreted as advice. It comes with no guarantee or warranty whatsoever.
