Buying versus renting in retirement

Comparing rental and ownership costs will help you determine which is the best bet for you.

By Anna Prior of The Wall Street Journal

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People who think about moving to a new home in retirement invariably plan on buying that home. In some cases, though, renting might be a better option.
Real-estate markets remain volatile. Even though home prices appear to be stabilizing in some areas, there's still a chance that the house you buy today could fall in value tomorrow.
For anyone weighing a move, one of the easiest ways to approach the buy-versus-rent question is to use the "price-to-rent ratio," says Dean Baker, co-director at the Center for Economic and Policy Research in Washington, D.C.
Take two houses of similar size and quality — one for sale and one for rent — in the same neighborhood or comparable neighborhoods. Take the price of the home for sale and divide it by the total cost of renting the other house for a year. If the resulting number is higher than 20, it's likely that the price of the home for sale could fall further. Thus, renting might be a better option, Baker says. However, the price is most likely near its low if the figure is 15 or below; 15 is the general average price-to-rent ratio over time, Baker says, and the number at which rental and ownership costs are close to even.

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Renting, particularly in urban settings, has "become a lot more attractive," says Hessam Nadji, managing director of research services at Marcus & Millichap Real Estate Investment Services, a real-estate investment brokerage firm based in Encino, Calif. Apartments and condos offer retirees easy access to culture, entertainment and leisure, with reduced maintenance burdens.

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But both Baker and Nadji say many factors should be weighed when considering renting versus owning. "If you have reason to believe you are building equity," Baker says, it's fine to pay more to own. A low price-to-rent ratio on a property that you plan on being in for a decade should be an attractive buy option even if the monthly payment is higher than renting, he says.

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But on the flip side, he adds, "if you are paying more in a context where you are unlikely to build equity, either because house prices are likely to fall or you won't be there long enough to cover transaction costs, then you are throwing money away."