Why Selling Your House and Renting in Retirement Is a Bad Idea

Cashing out your equity and getting the flexibility of a rental sounds great, but it could cost you—and your heirs.

Home ownership is usually touted as a keystone of financial stability, which is one reason why it’s so worrying that it looks increasingly out of reach for younger people. Older generations, on the other hand, are generally sailing into retirement years as property owners—80% of people over the age of 60 own a home (though about 40% of them don’t own the house outright and are carrying a mortgage).

Having that equity can be a real advantage when you’re retired, but houses also come with downsides. Even if you own them outright, there are costs to deal with, they require a lot of maintenance, and they can make it more difficult to change up your lifestyle. Cashing out your equity and using it to augment your retirement means you’d have more money to live on, and renting offers a lot of freedom and flexibility. All that maintenance? Someone else’s problem. Circumstances change, or you get bored living in a certain area? Easy to move and rent somewhere else.

Sure, there are some not-bad reasons to sell your house and rent when you retire, but it’s still not a great idea.

Financial downsides of selling and renting

Selling your house in order to rent comes with a long list of negative financial side effects:

• Capital gains. Depending on how much you clear from your house sale, you might wind up paying some hefty capital gains taxes. You can exclude up to $250,000 (if you’re single) or $500,000 (if you’re married), but anything over that will be taxed. If you bought your home decades ago and its value has gone up significantly, you might not make as much as you expect from the sale as a result.

• Loss of equity. Cashing out the equity in your house means you don’t have that equity anymore, right? Equity is pretty useful stuff, enabling you to borrow money easily when you need to. And paying rent means you’re no longer putting your money towards an appreciating asset: Home values generally increase over time (an average of 4.3% since 1991, and 7.7% since 2012), whereas your rent just buys you one more month with a roof over your head.

• Costs. As mentioned, even owning a home outright still costs money—but on average it costs significantly less than renting. Average homeowners insurance costs run about $2,230 per year, average property taxes run about $1,682, and home maintenance can cost about $6,000/year, for a total average cost close to $10,000 annually (your actual costs, of course, will vary). The average rent costs an average of $16,464 annually. While it might make financial sense in some areas of the country (average rent in North Dakota is just $10,560 annually), chances are you’ll wind up paying more for your housing if you sell.

Renting offers freedom—but also uncertainty

Despite the shaky math on cashing out your equity and renting, some folks still consider the option because of the freedom offered by renting. You can easily move to a different area, or just a different home if you don’t like the one you’re in. You can also easily downsize if your finances shift.

But that freedom can come at the cost of stability:

• You’ll have to deal with a landlord, who will have a certain amount of control over your life

• Your rent can rise—sometimes dramatically. In Columbia, South Carolina, for example, rents have risen more than 40% since before the pandemic, and have jumped almost 20% in New York City. You don’t have much control over the market rate for your rental, so you have to be prepared for rent increases—or to find a new place to live—on a regular basis.

• Having someone else worry about maintenance and repairs is great—if they actually do the work. If your landlord or management company at your rental isn’t responsive, you might be facing a protracted battle to get something done that would be easily handled if you owned the place.

Inheritance plans

Finally, a big aspect of cashing out your equity is your inheritance plans for your family. A house is an appreciating asset in most cases, so leaving it behind for your heirs means they’d have the choice of living there or selling the place and enjoying the windfall. Cashing out makes it more likely that you’ll spend the equity on housing and leave nothing behind for your children or other heirs.

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