Ben Franklin, who seems to have invented everything short of the iPad, once devised a system for deciding whether to take a particular action. He would divide a piece of paper into two columns, head one "pro," the other "con," and, over the course of days, fill in the blanks beneath each. Then he would weight his answers and eliminate items in the two columns that balanced each other out. Before long, it was pretty clear whether the pros outweighed the cons or vice versa.
Franklin called this process "moral algebra," and I mention it here because we might all want to do something similar in deciding how to house ourselves in retirement. Both renting and buying have their advantages and disadvantages, some of which might not be immediately apparent. A few to consider:
The most obvious advantage of buying is that you get to decide where and how you live. There's no landlord to raise your rent or sell your home out from under you. If you want to change the light fixtures, rip out a wall, or bring home a puppy, you won't need the owner's permission because you are the owner. You might still be at the mercy of local zoning laws, a condo board or an owners' association, and whatnot, but you get the idea.
Given the battered housing market in many places, you might be able to buy at a much better price now than you could have a few years ago. That improves your appreciation prospects somewhat, but it doesn't mean you'll be seeing double-digit returns anytime soon, if ever. However, homeowners do have some hope of making a profit, while renters don't. Plus, that profit could be tax-free when you eventually sell. Under current tax rules, you can exclude up to $250,000 in gains as an individual and up to $500,000 as a married couple, as long as you meet basic ownership and use tests (the details are in IRS Publication 523).
You might do OK in the long run if your home grows in value, but on a cash-flow basis, owning is generally more expensive than renting, says Marilyn Capelli Dimitroff, a certified financial planner in Bloomfield Hills, Mich. First, you'll have all the expenses associated with buying the home, such as the down payment and closing costs. You'll also have mortgage payments, which may or may not be more expensive than comparable local rents. On top of that, you'll have to pay for home?owners insurance, which is likely to be more expensive than renter's insurance.
When the hot-water heater conks out or a giant sinkhole swallows your patio, there's no landlord to call for help. You also get the pleasure of mowing the lawn, raking the leaves, and shoveling the driveway, or paying someone else to do it.
As many owners have learned in recent years, homes can take months, if not years, to sell.
Many of renting's pros are basically buying's cons, so I'll try not to repeat myself too much here. But, obviously, you'll have more freedom to pack up and move as the mood suits you if you're renting. If you plan to retire to a new area, it also makes sense to rent for a time just to make sure you really like it there, Dimitroff notes.
A recent survey by the Consumer Reports National Research Center found that people without major debts tended to be more satisfied in retirement than their debt-burdened peers. So if buying means a mortgage, renting might be a better alternative.
Perhaps the greatest financial advantage of renting over buying is that you won't be tying up your capital in a home and will instead be able to invest it. Historical data on home prices are notoriously slippery, but I have never seen any to suggest that the housing market is likely to outperform the stock market over any significant period.
There's something about home ownership that makes many people feel more a part of their communities.
If you're paying off a typical mortgage, at least some part of your monthly payments will go toward your equity in the home. And with any luck, your home will be appreciating at the same time. Whatever you pay in rent, however, is out the proverbial window (and it isn't even your window).
Whether to buy or rent is ultimately a personal decision, of course. In addition to listing your pros and cons, you can take advantage of some useful online tools that Ben Franklin probably never imagined. For example, you can plug in numbers and run different scenarios on the buying vs. renting calculator at www.ginniemae.gov.
This article appeared in Consumer Reports Money Adviser.