The article “Baby Boomers Have Made A Fortune On Real Estate — Here Are Three Reasons To Consider Cashing Out Now” was originally published on Financial Post on December 17, 2019.
Beware the belief that real estate prices will continue to climb at anywhere near the rate we have seen over the past 20 years
Long-time Canadian homeowners have benefited from declining interest rates and increasing home prices. As baby boomers, currently aged 55 to 75, continue to transition to retirement, they will be faced with decisions about whether to and when to downsize or sell their real estate.
Many boomers would highlight their home as their best historic investment, better than RRSPs in some cases. This may be a failure of the retail mutual fund industry as much as it is a hat tip to home ownership.
Real estate appreciation over the past 20 years in each of Canada’s largest three cities — Toronto, Montreal, and Vancouver — has outpaced that of New York, Los Angeles, and Seattle, according to data from Better Dwelling.
The most recent Royal LePage Boomer Trends Survey found that only 41 per cent of boomers intend to downsize. There are plenty of reasons to sell your real estate in retirement, and I would like to highlight three that have arisen recently in my practice as case studies. Names have been changed to protect privacy.
THE COTTAGE OWNERS
Carol and Ted are in their 60s and Carol is about to retire. She has a defined-benefit pension plan, and Ted has a RRSP he has contributed to diligently. He expects to work for a couple more years.
They rent a condo in the city and own a valuable cottage on a lake. They enjoy their time at the cottage but acknowledge they will not use or keep the property forever. They feel like it has been a good investment and want to continue to benefit from further growth in the value. However, they still have a mortgage outstanding on it.
In many cities across the country, young people are having a tough time affording homes, let alone second properties like cottages. Airbnb has also made it easier to find cottages to rent for a day, a week, or a month at a time.
About 5,000 baby boomers retire each week according to Statistics Canada. As they age, many will be selling their cottages. As they die, their children will be inheriting those cottages. Will children of boomers maintain two properties, in some cases co-owning cottages with siblings, or sell those cottages to pay down their own home mortgages? My guess is much more of the latter than the former. I know there is only so much waterfront real estate to go around, but there are also only so many potential buyers to purchase the coming flood of vacation properties.
My advice to Carol and Ted was to beware the belief that real estate prices will continue to climb at anywhere near the same rate we have seen over the past 20 years. Selling their cottage would allow them to pay off their mortgage, supplement their retirement savings, and simplify life as they transition to retirement.
THE WORLD TRAVELERS
Albert and Laura moved to Canada 30 years ago and have lived in a few cities where Albert has worked with different companies. Now that Albert plans to retire next year, they expect to spend half of the year sailing around the world and half of the year back in Canada.
Their plan was to rent out their house and visit friends and family or stay on their boat while back home. They do not want to stay in their house long-term but want to stay invested in the local real estate market. They also like the appeal of rental income to complement their investments and generate pension-like monthly payments and ongoing inflation protection.
The annual rent they expect to receive for their house is equal to about three per cent of the market value per year. The dollar value of the rental income is appealing to them, but when I pointed out how low three per cent is as a percentage, and how much of their net worth is tied to their house value, they were open to alternatives.
Their realtor found them a condo for less than half the value of their house that could generate about five per cent annual rental income relative to the market value. It was much more rentable than their house, with less potential maintenance or repairs, and more likely to be a place they would like to live than their house after several years of planned travel.
Albert and Laura are considering selling their house to buy two condos, renting them both out for now, with a plan to move into one in the future.
Shortly after Andrea and Brian retired, Andrea developed a progressive health issue. Her mobility has declined, and she has developed mild cognitive impairment. Brian is doing his best but needs help. They have a caregiver who is with them eight hours per day and seven days per week at a significant ongoing cost.
A big problem Andrea and Brian are now facing is that their house is a five-level backsplit with several rooms and stairs between levels. It has fallen into disrepair and has a pool and gardens that require maintenance. Andrea is limited to living in a single room, and Brian is having trouble going up and down the stairs to do laundry and household chores due to a knee problem.
They could use some of the proceeds from selling their house to replenish their retirement savings, which have been depleted to pay for Andrea’s care. Brian would like to move to a bungalow for a couple years and is not quite ready to move into a retirement home.
My concern for them is the cost of moving twice in the next few years — real estate commissions, land-transfer tax, legal fees and movers — will further deplete their savings. The financial cost aside, it has been a difficult process for them emotionally to consider leaving their long-time home. The stress of one move let alone a second has proven significant, and change will no doubt become more difficult as they age.
I have encouraged them to consider renting in a retirement community with onsite long-term care assistance. Living on one level instead of five and having a social life onsite instead of being housebound could be really life changing for them both.
Baby boomers who have benefited from the run-up in real estate prices preceding their retirement may be that much more biased to think that the good times will never end.
Boomers with cottages — or any home for that matter — need to question whether subsequent generations of homeowners are going to want to buy that particular property someday as tastes, priorities, and trends continue to change.
Health problems are often sudden and unexpected, and it can be easier to transition from the home that was right in the past to the home that is right for the future well ahead of time.
I am surprised by how few retirees downsize or sell despite the potential benefits, and this highlights the personal nature of money and financial decisions. There is not just one right approach to real estate in retirement, but it can help to consider what other people are doing as you try to make the choice that is best for you.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.