Seniors downsize for a lot of reasons. For some, it’s a financial decision driven by rising property taxes and healthcare costs. For others, downsizing is a way to simplify life and take a few things off the to-do list.
No matter the reason for downsizing, all seniors face the same decision: What should they do with their current home? Selling may seem like the obvious choice, especially for seniors downsizing for financial reasons, but is it really the best one?
3 Reasons to Rent Instead of Sell
Instead of selling your home, consider holding onto it as an investment and renting it out. Renting out your property comes with three distinct benefits:
- It generates passive monthly income.
- It creates wealth through appreciation.
- It allows you to leave the home to family while covering the ongoing costs of ownership.
Renting can be an especially prudent option for seniors moving into an independent living community. In the state of Montana, independent living facilities average $3,560 a month. Most independent living communities offer various amenities such as housekeeping, meal plans, and as-needed care in independent living environments. While rental income will only make a small dent in the cost of a luxury independent living facility, it could nearly cover the cost of the most affordable communities. Therefore, while it’s important to tour facilities to choose a community where you feel at home, make sure you’re paying attention to cost, too.
Of course, these benefits only apply if you own a home in an area with appreciating property values and rents high enough to not only cover expenses, but generate profits, too. That means you need to do some math. Compare rental prices to the costs of maintaining the home, including mortgage payments, taxes, insurance, HOA fees, and repairs to see if renting pays off. If you’re not up for the task of being a landlord, include property management fees in your calculations as well. Keep in mind that while you’ll owe taxes on rental income, you can deduct expenses associated with renting your home.
When Selling is the Better Option
For many homeowners, converting a property into a rental isn’t an option, because their ability to buy a new home hinges on the proceeds from selling the old one. Since second homes typically don’t qualify for FHA-backed mortgages, buyers need the full 20 percent down payment. While it’s possible to tap home equity for a down payment, doing so could push your debt-to-income ratio to a level no longer acceptable to lenders.
If you can’t qualify for a second home mortgage, can’t afford to maintain two residences, or simply don’t want the hassle of owning a second home, selling is the way to go. By selling, you can purchase a large amount of equity in your next home and reinvest excess sale proceeds for future income. Home prices in Billings have only gone up in recent years as the area continues to explode.
For most seniors, the biggest drawback of selling their home is that they can’t pass it on to children. However, before you maintain a second home for a decade or more, find out if your kids actually want it. While passing on the house you worked so hard for is a great sentiment, if your children don’t live locally, already own homes, or don’t agree on what to do with the property, inheriting the family home could be more of a burden than a blessing. If you do plan to bequeath your home, have a conversation about estate planning with your children and discuss the tax implications with a financial advisor.
Ultimately, the right decision for your home depends on your financial situation and your priorities. For seniors seeking a way to leverage their home equity, renting can be a smart choice. But if you’re looking to simplify, selling is the best way to get your old house off your hands so you can move on to your downsized life.
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