Buy vs rent for retirees and downsizers

The question is different after a sale

A younger buyer decides whether to commit to a mortgage. A downsizer often has the money in hand and decides whether to tie it up in a smaller home or keep it invested and pay rent.

There are three common paths: stay in the current home, sell and buy something smaller or simpler, or sell and rent. Each releases a different amount of equity and carries different ongoing costs.

This page compares the second and third paths in an illustrative case. It does not cover pension, benefit or tax specifics, which depend on your situation and should be discussed with a qualified professional.

An illustrative downsizing case

Suppose a household sells a larger home and has $600,000 available. It can buy a $600,000 condo outright, or rent a comparable two-bedroom at $2,900 a month and invest the $600,000.

The assumptions: a monthly condo fee of $600, home insurance of $600 a year, maintenance at 0.3% of value a year, $100 a month for extra utilities, 3.5% yearly appreciation, 3% rent growth and a 5.5% yearly return on the renter's investments. Closing costs apply, and selling costs are deducted at the end. These are illustrative inputs only.

The owner's monthly cost is about $1,225 (fees, tax, insurance and upkeep, with no mortgage) against about $2,925 for the renter. In the comparison, whoever spends less each month invests the difference, so the owner's lower monthly cost builds a portfolio while the renter invests the $600,000 up front. The question is what that capital earns compared with what the home does.

How the horizon changes the result

Because there is no mortgage, there are no interest costs to weigh against rent. The result mainly depends on how fast the condo's value grows, how fast the fees grow, and what the invested money earns.

On these inputs, the owner is ahead at every horizon shown, and the lead builds over time.

What can reverse the answer

Three inputs matter most: appreciation, the rate of return on investments, and the condo fee. We changed each one in the 10-year case while holding the rest fixed.

If the condo appreciates at 2% instead of 3.5%, the renter finishes ahead by $30,052. If there is no appreciation at all, the renter is ahead by $149,501. If the investment return is only 3.5% rather than 5.5%, the owner's lead grows to $227,056, because the renter's capital earns less. If the monthly fee is $900 instead of $600, the owner's lead falls to $19,920.

Things the numbers do not capture

Retirement adds considerations that a calculator cannot weigh. Many people value staying in a familiar place and owning their home outright for the sense of security. Others value freeing capital and avoiding responsibility for upkeep, special assessments or a sale later.

Think about access to care and services over time, proximity to family, accessibility of the building, and what happens to the home as part of an estate. Selling later, in a hurry, may cost more than selling by choice.

Pensions and other retirement income affect both options, and so does tax treatment of investment income. This guide does not give specifics, so speak with a qualified professional about your circumstances.

• Accessibility and the layout of the building over the long term.
• Condo fees that rise faster than retirement income.
• How easily you could sell or exit if your needs change.
• What you intend to leave to family, and how each option affects it.

A middle path

Downsizers do not have to choose all or nothing. You could buy a smaller home for part of the proceeds and keep the rest invested, or rent for a year or two to test a neighbourhood before buying. Either keeps some liquidity.

To test those paths, change the price and the down payment in the main calculator and compare the outcomes. See condo fees and special assessments for what to check in a building before you buy, and forced savings and home equity for the equity side of the picture.