Housing Choices in Early Retirement: Rent vs. Own 

One of the idiosyncrasies of the ERN family early retirement plan is that it involves a relocation. It’s not that we don’t like our current location. But even with our nest egg solidly in the seven figures we likely couldn’t afford to retire here comfortably because of the insanely high housing costs. The state income tax rates are also unpleasantly high. So, if everything goes well we will relocate to another state with low or no income tax and lower housing costs.

The options we consider:

  1. Own a house, mortgage-free
  2. Own a house, plus mortgage. But what term: 30-years or 15-years?
  3. Rent a house or apartment, long-term
  4. Nomadic lifestyle: have no fixed residence, move from place to place with light luggage

Ok, I have to admit, I threw in that last option just for fun. Some people can pull it off (GoCurryCracker), but I doubt that the nomadic lifestyle is for us. I like to have a home base! The way I can tell is that as much as we love to travel, it’s always nice to come back home to sleep in our own bed. Even if I know I have to head back to the office the next day. Seriously!

Quantifying the tradeoffs

We can write as much as we want about the pros and cons of renting vs. owning, but in the end, it all boils down to the numerical assumptions, especially the rental yield (annual rent divided by purchase price):

  • If we can rent a house for only 5% p.a. of the purchase price or less it’s likely a no-brainer to rent. The opportunity cost of our money tied up in a house plus the depreciation and taxes would be too large. Unless, of course, we factor in huge property appreciation. But our baseline assumption is that property values appreciate with the rate of inflation. The last time folks were budgeting outsized returns in housing it didn’t end so well, remember 2008/9? So, renting can be much smarter than owning, see some examples at 10!Rocks and Millenial Revolution.
  • If the annual rent is 10% or more of the purchase price, it’s almost a slam dunk to buy.

Somewhere in between has to be the sweet spot. Let’s check where’s that crossover point in the rental yield! Continue reading “Housing Choices in Early Retirement: Rent vs. Own “

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