Downsizing baby boomers face choice
By Michele Lerner
Jan. 20, 2018 at 11:28 p.m.
After 20 years of a car-centric lifestyle in a large house in Bethesda, Maryland, and nearly a decade of lobbying her husband, Roxanne Littner achieved her goal of moving into the District of Columbia.
"My husband was more attached to the house than I was and wanted to stay longer, but when we had a plumbing issue and the basement flooded, I put my foot down and set a date to sell our house in a year," Littner said. "We started looking downtown at different neighborhoods and couldn't find anything we wanted to buy with 1,500 square feet or more that we liked and that wasn't outrageously expensive."
Littner and her husband, ophthalmologist Roy Rubinfeld, opted to move into an apartment in the Kennedy-Warren district in Northwest Washington. They quickly discovered that the services provided and the freedom from maintenance suited their lifestyle.
"It seems to make financial sense to rent, because we don't pay high condo fees or have to pay for repairs," Littner said. "We own a second home in Italy, and renting gives us the flexibility to be gone for months at a time if we want, since we know the Kennedy-Warren staff will take care of our place in the city."
The rent-or-buy decision is more commonly thought of as a dilemma for young professionals establishing their households, not people approaching retirement. But whether it's a financially savvy decision or simply the only solution when they can't find a suitable place to buy, some baby boomers are choosing to rent an apartment downtown when they downsize.
"Many of our clients who are at or near retirement like the idea of downsizing and moving into the city or closer to the city, and they assume it will be less expensive than maintaining a large home," said Laly Kassa, managing director of financial planning at Chevy Chase Trust in Bethesda. "The reality is that it's just as expensive to move closer to the city to an area that's walkable and close to transit. Some are opting to buy, and some are opting to rent, but the decision is unique to each client."
According to a 2016 Freddie Mac survey of boomers, the majority of those 55 and older plan to stay in their homes during retirement. Among those who plan to move, one in five say they will sell their home and buy a new one, while one in 10 say they will sell their home and rent when they move. Data from TenantCloud, a property management software service, shows that nearly one-third of all urban applications are for renters older than 60.
Barbara Manard said she loved her three-story home in Chevy Chase, Maryland, but always planned to "right-size" and move downtown someday.
"I love the country and the city, and spent about two years looking at open houses in both environments," Manard said. "I eventually focused on the Cathedral Heights area in Northwest D.C. because I was attracted by the idea of aging in the city where it's easier to bump into lots of people and establish a social network. Living someplace walkable is more and more attractive to me."
Manard rented an apartment for six months while she sold her house and found the right condo to buy.
"I liked renting for a while, but eventually it started to feel like a hotel since it wasn't really mine," Manard said. "Financially, I felt it was better to have some assets in D.C. real estate, and I wanted the security of knowing my housing payment and not worrying that the rent might increase."
Although the District of Columbia definitely draws millennials, baby boomers are also moving downtown. According to the Census Bureau's American Community Survey, there was a 3 percent jump in the number of adults ages 55 to 64 moving into D.C. between 2010 and 2015, compared with a 2 percent increase among people ages 30 to 34, and a 3 percent decline among people ages 25 to 29 during the same period.
Testing city life
Many baby boomers who think they want to downsize into a city condo are surprised that it will cost them as much to buy a condo as they would pay for a house, said Ellen Sandler, a real estate agent with Evers & Co. Real Estate in Washington.
"Some decide to rent to get the services and lifestyle they want, especially if they have enough assets to throw off enough income to pay the rent," Sandler said.
Susan Berger, Sandler's real estate partner, said rents in the city are so high that people are sometimes disappointed that the amount of space they can rent is less than expected, even though they are avoiding condo fees and maintenance costs.
Kassa said that some of her clients are "testing" city life by renting a small place in the city while they keep their large suburban house for weekends for a few years.
"For someone new to city living, it's better to rent temporarily until they decide if they really want to live there full time, and to choose the right neighborhood," Kassa said. "An important element of the decision is how much flexibility they want. If there's short-term uncertainty about the choice, or if they want long-term flexibility so they can easily move around to be near grandchildren, renting can be smarter."
Tim Hewitt, a senior wealth adviser with the Wiley Group in Conshohocken, Pennsylvania, as well as a licensed real estate agent with United Real Estate in Wayne, Pennsylvania, said the first step for baby boomers is to understand their goals, such as whether they want to live near family members or buy a vacation home for future retirement use.
"After the goals are established, we can do a cost-benefit analysis and determine how much equity they have in their home, how much it would cost to sell it and how much equity they would want to put in to another house," Hewitt said. "People are often surprised by the high cost of moving to a walkable neighborhood close to or in Philadelphia, but they typically still choose to downsize because they don't want the space in their suburban house, and they want the city lifestyle."
Although clients want to know whether renting or buying offers a better return on their investment, Kassa said, no one can know that with certainty until after the fact, because it depends on real estate and stock market fluctuations.
Fred Klein and his wife, Jill Klein, said they were ready to leave behind their house in Potomac, Maryland, to downsize and to shorten their commute, but the couple initially decided to rent a small apartment to determine whether full-time city living would appeal to them.
"Within three days of moving into a one-bedroom apartment in the Kennedy-Warren, we decided we loved it," said Fred Klein, a lawyer with DLA Piper Global Law Firm in Washington. His wife is a professor at American University.
The couple eventually sold their house and moved into a larger apartment in the same building.
"We worked with our financial planner at Chevy Chase Trust to project the cost of buying a condo versus renting, and we felt that the flexibility of renting outweighed the negative financial aspects, such as the absence of tax benefits and paying high rent," Fred Klein said. "We're planning to renew our lease again for a year or two because we don't think we can get the great location, size and comfort level of what we have now without spending a ton of money."
Hewitt said that 80 percent of his clients don't want to rent because they don't want to lose control over their home to a landlord and don't want the possibility of paying higher rent in the future.
The 20 percent of Hewitt's clients who are open to renting can often find more rental properties in the city than condos.