Thursday, February 25, 2016

Why Not Rent?

I’ve been rolling around ideas for what my retirement will look like for some time now, and I like to look at what other people further along than I am have chosen to do. For some reason there is an overwhelming tendency to buy a second property instead of renting.

I’m most interested in the strategies of those who split their time between Canada during the nice months and somewhere warm in winter. The ones who avoid winter for only a month or less usually rent, but the ones who avoid the whole winter tend to buy.

When I run the numbers, renting makes a lot of sense. Buying requires a large initial cash outlay followed by ongoing property taxes, condo fees, and maintenance costs. Monthly rental costs may seem high, but I would only pay them for a few months per year. The costs of owning are year-round.

It’s possible that many retirees get the cost comparison wrong, but I suspect there are reasons other than costs that dominate. Renting has the advantage of flexibility. Owning gives greater stability. No doubt some retirees are willing to pay for this stability and do so with their eyes open. In other cases, I’m not so sure.

I’ve been told things like “there aren’t many good places available to rent where I want to stay.” My usual reaction to this is “how many places do you need?” However, most who say this just never considered renting. I guess they prefer to own for some reason.

I can certainly see the advantage of not having to arrange to rent a place each year. And I can see the advantage of having a subset of your stuff waiting for you at a place you own. The question is how much would I be willing to pay for these advantages in terms of money, lack of flexibility, maintenance effort, and time spent worrying about whichever of my properties I’m not currently occupying.

Another possibility is that I’m talking to a generation that looks down on renting. They think of renters as losers who live in crappy apartments. This isn’t true of all retirees, but it’s true of some.

In the end I don’t think I’m any closer to a decision, and I’ve still got time to decide.

23 comments:

  1. Ownership of property was "the goal" of the "greatest generation ever", however these days, so many people are buying condos, which I don't view as property, I view it as living space. Rental makes sense as long as you don't make yourself "rental poor" by renting too large a space, and invest instead.

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    1. @Alan: Condos certainly maintain an element of renting with their condo fees. But buying a condo still gives some of the headaches of ownership.

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    2. Precisely, I would rather own a property outright than have Condo Fees and such.

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  2. re: "Ownership of property was "the goal" of the "greatest generation ever"..." as demonstrated by Bush Jr. and his push to make every American a homeowner. Huh?!

    Not mentioned in your article is that the owned property can possibly be rented out during the non-occupied months. If successful, this would close the cost gap between renting and buying. But then you have the new headache of being a landlord (and retirement is supposed to be about less stress, not more!).

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    1. @SST: Renting out an owned property is a possibility, but it is challenging to find renters for a vacation property down south during summer in Canada. The people I know who rent out their vacation property do so during winter when they choose not to head south themselves. I wouldn't want to be a landlord, but to each his or her own.

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    2. Hi Michael, very excited to read this post and I hope more in the area of retirement planning follow. As an indexer, I have the here and now figured out, but the future, especially retiring for months of a year somewhere nice is something I need to figure out. Luckily, just like you I have some time. :)

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    3. @bmfinc: I'm definitely motivated to sort these things out, and I'll write about anything I think is useful. However, this is a personal process, and I think whatever I come up with will be just one example of many possibilities.

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    4. Sure! When I first started indexing I read 10+ blogs on it now I am just down to yours, there isn't too much new with indexing. Retirement on the other hand is different, so it is interesting to see what financially like minded people are thinking about it.

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    5. Hi MJ;

      Many things to consider. The known knowns, the known unknowns and the unknown unknowns.
      1) Some states, like Florida, charge you a special rate as a "non-resident" owner. Guess what? It is a hogher rate than the "real" Florida residents (year round)And this applies to US citizens as well.
      2) Some states, again Florida comes to mind, have passed laws restricting the minimum time you may rent your condo out. I have heard three months minimum although I am sure you can work around that a little bit. The hotels were not appreciative of condo owners "stealing" business from them with tow week rentals. Especially the lower end short term rental hotels.
      3) Medical insurance. When you reach 80 years of wisdom your health care travel insurance will take a big step upwards

      The B.I.L. used to own a condo in Pampano Beach right on the beach. The condo fees were around $10K per year (it was a secured building)Plus maintenance. Kept a car down there. Brakes were always jammed up from the salt. He sold that off and now rents higher end houses where ever he wishes to go. Greek islands, USVI, this year in Florida. If you have the money then travel at your convenience and see the world.

      RICARDO

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    6. @Ricardo: I've heard of the higher property taxes for people who don't stay year round. I think the 3 months renting restriction only applies in some places. I've rented for only a week in Florida many times. Medical insurance is definitely a concern in the U.S. whether you buy or rent.

      Condo fees often surprise me. With your $10k/year example, at 4% that capitalizes to $250k. There are some places I wouldn't take for free if I had to commit to such high condo fees.

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  3. Renting carries a larger risk of costs going up due to inflation. Buying ties in your money which may be partially offset by value of your purchase going up.

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    1. @BHCh: It's true that renting has the risk of rising rents, but this is far less risky than owning. Falling real estate values or difficulty in selling are much larger risks than the possibility of rising rents.

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    2. Well, owning is an investment. Difficulty in selling is generally associated with poor investment choices. And you will gain if you hold your investment over a long period of time. And yes, there are risks which you balance against potential gains. In the mean time you get to use the place.

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    3. Yes, because property always goes up in value (in sarcasm font).
      Owning carries the risk of interest rates going up (same as renting carries the risk of rents going up). Renting = more flexible, less long-term commitment, more money in your pocket, easier to get out if you need to. Does no one remember 2008/2009 in the US?

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  4. We're not ready for retirement yet, not financially nor mentally, but we are mulling these ideas over as well. One consideration for us is downsizing to a small, owned apt. or condo, and then renting wherever we go. Seems to be the best for our upcoming lifestyle.

    We feel owning more than one property can be expensive but there are more factors to consider than just money.

    Do share your decisions when you decide.
    Mark

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    1. @Mark: I like the idea of downsizing to something comfortable but smaller and renting everywhere I go, but my wife has different ideas. We're still trying to sort out the right compromise.

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  5. IMHO
    As a person who was dragged to Fla. when I was 16 and returning pretty well every year since then, I can see this from both sides. Renting is nice, particularly because you can try a different place every time you go away. Having a reasonably priced place to go where you can leave a car in the garage and make friends in the area has its advantages as well.

    There are numerous areas in fla. where you can get a 55+ condo for less than $60 K some in the $40's further from the coast, with <$200.00 condo fees and <$800.00 property taxes. Nice "safe" areas being the key here. Many with pools, gyms, and community rooms. The Gulf coast is littered with these places. I have been in them personally. These are condos that in 2008 were worth $200,000. So if a nice little 2 bedroom clean well kept condo 30 to 50 km's from the beach appeals to you, (that you could also sell again don't forget the prices have stabilized over the last 5 years) it's very affordable to purchase one. Our exchange rate kind of sucks at the moment, but that's harder to predict. If you have family, relatives etc. maybe a family buy could make this even more affordable and it could be shared among siblings. I consider the gulf coast my second home so for me the choice was simple.

    As for the "home ownership" references above, I will leave you with Bill Clinton's words in 1996.

    Expanding Affordable Housing

    "Over the past few years, I have emphasized three basic ideas—community, opportunity and responsibility—that I believe are at the heart of a more dynamic and prosperous America. The priorities of the Department of Housing and Urban Development, from making sure that hardworking Americans realize the dream of home ownership, to addressing the tragedy of homelessness, are outstanding examples of how our government can empower people and institutions.”
    —President Bill Clinton

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    1. @Paul: Thanks for sharing your experience. I know people who have places for about the prices you quote. The main downside I see in their cases is the time, effort, and money they put into upkeep of two properties. For some people, maintaining a property is a satisfying way to spend time. I feel differently. But I do see the advantages of stability and forming a group of friends.

      As for Clinton's words, I like the idea of creating affordable places for people to live, but I'm no fan of government efforts to encourage people to take on more mortgage debt than they can handle.

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  6. The HOA fee at that $200.00 level is a pretty good value in these condo units. For US$2400.00 / year everything externally is covered. You just show up and have fun...

    Maintenance, pool, insurance, laundry facilities, lawn/land maintenance, master association fee, exterior pest control, reserve... is typical of what it covers.

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  7. Michael, you're wise to take your time to find the right solution for you and your wife.

    My wife and I have both have parents that owned US vacation homes. "We" have chosen to do more world traveling at this point, after my push in 2009/10 to purchase something in Florida failed (with my wife). In hind sight this would have been a good financial decision......Although last year part of our winter (10 weeks) was spent in southern Texas.
    My wife enjoys all seasons here. I suspect in another 10+ years when we're closer to typical ages for most of the retirees we've seen we'll consider spending longer stays down south. Although, choosing to stay in a particular community to develop friendships and dealing with costs/home ownership headaches vs freedom of moving around and renting will make a tougher decision. We have several friends that bought years ago and actually sold due to runaway HOA fees.

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    1. @RBull: A few years back I met a friend at the place he was renting and he told me that the rent he was paying was less than the HOA + hydro that the owner was paying. Those who do buy need to understand HOA costs.

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  8. Do you know of any blogs that specialize in this area? Southern retirement for Canadians? I have done a couple of searches, but have not really found much.

    BTW - I like the couple of comments about having a plan that both you and your spouse agree to, how true! :)

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    1. @bmfinc: You might try looking up the Canadian Snowbirds Association.

      I agree that any plan has to have both spouses on board.

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