Updated: Sep 22, 2020
Downsizing to a smaller home has a significant upside for older homeowners. For example, downsizing allows you to have a more manageable space, reduces home maintenance expenses, and other monthly costs, and provides more financial flexibility. If you are downsizing, you certainly aren’t alone; according to the 2017 Zillow Group Housing Trends Report, 46 percent of Baby Boomers who sold their homes were downsizing. Once you've decided to downsize, your next step is to figure out what to do with your current home. You basically have three options: rent it out, keep it in the family, or sell it.
The Benefits of Renting Out Your Home
If you are not going to sell your old home to pay for your new one, you will need to have enough money for a down payment, as well as your monthly expenditures. This way, you can easily determine how much you can afford to pay for a new home. So, create a detailed budget in order to help you make a sound financial decision.
The biggest reason why you might want to keep your home and just rent it out is income potential. A stream of income is a nice bonus for older adults, especially if you are on a fixed income. Becoming a landlord isn't easy, but it's not impossible. You'll need to figure out a monthly rental price that tenants can afford but is also enough to cover your bills and leave some profit. According to Smartasset.com, landlords typically charge between 0.8 and 1.1 percent of the home's value. Therefore, a $200,000 home could be rented for $1,600 to $2,200 a month. Keep in mind, you'll still need to pay any mortgage remaining on the home, as well as property taxes, homeowners insurance, and maintenance and repair costs. Also, consider hiring a property management company, which may cost 8 to 10 percent of the monthly rent.
The Case for Keeping It in the Family
For sentimental reasons, you might want to keep your house in the family. If you were planning on leaving your home to a family member upon your death, you might allow them to move in your house now. By going this route, you can rest assured that the home will be occupied by someone you trust, rather than by renters who you don’t know.
When it comes to family and money — or, in this case, property — you need to be very careful. Establish a clear arrangement with your loved one. Will your family member be expected to pay rent? Who will be responsible for utilities and home repair costs? Who will arrange and pay for lawn care and snow removal? Will you be able to visit the home regularly? Have an open conversation to clarify all the details. Put any financial arrangements and other clarifications into writing; the last thing you want is to create a rift with someone you love over the house.
Why You Might Want to Sell
Selling the home now might make the most sense financially. The profit from the sale of your current home could be used to pay for a new, smaller home (or offset some of the costs of assisted living or other housing arrangements). Selling can give you the peace of mind and financial flexibility that you may want throughout your golden years.
When calculating the potential profit, consider all the expenses associated with selling, buying, and moving, including real estate commissions and closing costs. You also may need to make renovations and hire a home stager to get the best price for your house as well. Your profit also could be subject to capital gains taxes. Work with your real estate agent to determine a reasonable asking price and consider all these expenditures before putting your old house on the market or setting a budget for your new home.
Seniors downsize for a variety of reasons. You might not want all the space or costs associated with your large home. Additionally, you may want to move closer to family, or you may have certain health concerns that prompt you to transition to assisted living. Regardless of the reason you’ve decided to downsize, you need to make a choice about what to do with your current house. With some research, you can devise a well-thought-out plan and make the right decision for you — both financially and personally.
Article written by Jim Vogel