Sell your house and rent: If you’re a baby boomer entering retirement, that could be the financial move of a lifetime.
The case for selling the family home starts with the fact that years of strong price increases have hugely increased the value of homes across the country over the amount paid for them. What to do with the proceeds after you sell? Invest them conservatively and rent your next home.
Rushing into the market today only makes sense if you’re willing to buck convention and rent. If you buy again, you could reap big profits from your current home and overpay for your next.
Understand, this is not a doomsday call on the Canadian housing market. It’s just an argument that we’ve seen a ton of upside in house prices and that the next few years may bring incremental further gains or some downside.
Selling now can be a way of removing risk from your financial future, says Ted Rechtshaffen, president of the financial advice firm TriDelta Financial. If you own a house, a big piece of your personal wealth is tied up in one sector and in one region.
“The only way to capitalize on what your house is worth today is by selling today,” Mr. Rechtshaffen said.
There are definitely benefits to downsizing and buying a smaller home or condo rather than renting. There’s a far better selection of condos and houses for sale than for rent. Psychologically speaking, many people have a bias against renting because it’s seen as giving up control and living without roots.
There’s also the argument that renting isn't financially smart, but it doesn’t hold up well for aging baby boomers.
Mr. Rechtshaffen says his firm’s long-term financial planning models use a 4-per-cent average annual gain for house prices and a 6.5-per-cent average annual gain for a diversified non-registered investment portfolio. Those are pretax numbers, of course. Sell a principal residence and you pay no taxes on your profit.
You can rig an investment portfolio to be fairly tax-efficient by focusing on dividends and capital gains, but you’ll still get dinged to some extent by taxes. So estimate a 5-per-cent after-tax return from investments, Mr. Rechtshaffen suggests.
Now for living costs. You’ll have no mortgage payments if you buy, but you’ll pay property taxes and face upkeep costs that can be steep if you have an older home. Renters pay rent and the same utilities as owners. How does it net out? Mr. Rechtshaffen estimates renters paying $1,500 a month may find they’re spending only $700 or so more than owners on a net basis.
Financial planner Rona Birenbaum said she’s talked to clients about selling a house and renting, but mostly in situations where money is being spent faster than anticipated and there’s a need to unlock equity in the home.
Selling a house for many hundreds of thousands of dollars and then investing that money safely can make you feel financially secure, Ms. Birenbaum said.
“That’s the plus side of doing this,” she added. “The minus is there’s a great temptation to encroach on that capital. It requires a fair amount of discipline in how you manage your cash flow.”
Still stuck on downsizing into a smaller home or condo? So are a lot of your peers, which is why downtown condos are no bargain. The average price for a resale condo in Toronto was $326,750 in the first two weeks of this month, according to the Toronto Real Estate Board. Laurin Jeffrey, a Toronto agent, said $600,000 is a good ballpark amount for a nicely situated downtown condo.
