I had a great conversation with clients recently who were planning for their retirement. We chatted about their timelines and ways of planning in advance to set things up for their future. This ranged from selling their existing home and renting or buying, weighing the benefits of homeownership or getting out of the housing market as owners. Here is the breakdown of their assets that we used for our projections.
Their current home has a market value of about $1,200,000 with no mortgage and they have some savings and RRSP’s, however we mostly just strategized around their Real Estate.
We determined that if they sold their home, they would have equity of about $1,140,000 to invest. Our conversation was about how to best set up the future with this large amount of equity. They are travelers, so it was important that they had enough cash to take the trips they had dreamed about. Below is one of the options we discussed.
We determined if they were to sell their current home and purchase a home in Oshawa with a legal accessory apartment they would pay in the range of about $800,000 for the home. After purchasing and paying the closing costs they would end up mortgage free with $300,000 left over to invest. At the current rates of about 4% that would result in a $12,000 per year return. Along with this the accessory apartment would rent out for about $1,800/month. This would mean they would have a combined income of $33,600 per year. This would be taxable income. However, with both being retired they would have lower incomes and the tax consequences would be minimal along with some of the home expenses would be deductible with part of the home being used as a rental property.
The other idea they had was rather than investing the $300,000 in the stock market they would purchase a property in Florida to spend the winters in. The $300,000 would become about $225,000 when converted to American currency and with this they could purchase a home northwest of Orlando in “the Villages.” The carrying costs of the home would be about $300 per month and would be a perfect winter getaway. The upside is that while they would not be earning investment income off of their equity, they would still be receiving $21,600 in rental income and would have someone living in their property ensuring that it is being taken care of. A quick check indicates that if the person decided to rent their winter home out during the months they are not there the rental rates would provide an income (in USA dollars) of $3,000 -$4,000.
I have spoken to many homeowners who have lived in their homes for decades without exploring the different uses of home ownership by downsizing and shifting their equity to different properties. Even if a homeowner decided to winter in Florida and rent vs. own a vacation property, they could still afford the travel having the investment income pay for their Florida stay.
There are multiple options for homeowners in Durham Region who are exploring the possibility of selling their properties and re-investing their equity in different areas with amazing benefits. I have spoken to many people who felt they stayed in their homes too long and their quality of life declined as the costs of carrying a home they had lived in for many years increased to a point where they struggled to cover the costs which impacted their ability to travel and enjoy small luxuries that were not possible with a strained budget.
There does come a time when home ownership needs to be revisited to determine if it is the right option or if downsizing makes more financial sense.
The end of the conversation with the retiring couple was that they were calling their accountant to see how much income tax they would pay for owning a property locally with rental income and a property in Florida that they would rent out when there were not using it. A good problem to have.
If you are curious about exploring the possibility of downsizing, I can be reached at lindsay@buyselllove.ca or 905-743-5555.
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