The article When does it make sense to sell real estate in a larger city and buy in a smaller one? was originally published on MoneySense on May 31, 2021.  Photo by Shelagh Murphy from Pexels.

If Alison’s annual rent exceeds 5% of the cost to buy a comparable home, she may be in a buyer’s market.

Q. I am currently living in Saint John, NB, and renting ($1,450 a month + Internet—very expensive for this little town). I also own a condo in Burlington, Ont., worth about $500,000, which I have been renting out for the past two years. With income taxes factored in, the rent just covers carrying costs.

Recently, my tenant gave notice, and I started a permanently remote job—so I have essentially no geographic ties, and I’ve become very fond of Saint John. I’ve been thinking that if I sold my condo, I could be mortgage-free here. But people keep warning me that if I leave the real estate market in Ontario, I will never get back in.

With inflated housing prices, higher taxes and historically slower real-estate turn around, is buying in New Brunswick a wise investment? As a single homeowner with an income of $80,000 per year, I am extremely limited in Southern Ontario.

A. Although the decision to buy in Saint John and sell in Burlington are related, Alison, I would be inclined to consider the two independently.

First off, I agree that $1,450 per month seems expensive in Saint John. If your annual rent exceeds 5% of the cost to buy a comparable home, you may be in a buyer’s market. This is a broad generalization and depends on related costs like potential renovations, repairs and condo fees, as well as other assumptions like capital appreciation, mortgage interest rate, and so on.

Using that broad generalization as a starting point, if you could buy for less than $350,000, you may want to at least compare the two options. There are plenty of nice, detached homes available in Saint John for a fraction of that price.

If you think you might be in Saint John only temporarily, I would be less inclined to buy because transaction costs to buy and sell may make renting a better option. Given what you’ve shared, that does not sound like it is the case—and, on that basis, I would consider buying in Saint John.

However, that does not mean you need to sell in Burlington. You need only a 5% down payment to buy an owner-occupied home. Depending upon where you buy in Saint John and the price of the home, you may need $10,000 or less. From a cash-flow perspective, your mortgage payments would be far less than your rent. The cash-flow-neutral rental property would probably not limit your ability to buy a second property, but seeking a mortgage pre-approval could help you know for sure.

I would consider both the financial merit of keeping the rental, as well as the complexity of managing the property from afar.

It sounds like you have a lot of equity in your condo, if you could sell it for $500,000, pay off your mortgage and buy for cash in Saint John. If the property is cash-flow neutral and not generating a profit, that suggests the rent is relatively low. If you could rent it to a new tenant at a higher rent, you may want to run the numbers to see how the rental property compares to alternative investment options, like stocks and bonds. If you have RRSP and TFSA room, the ability to sell and top up those tax-preferred accounts is another factor to consider.

If you do not think you can increase the rent for a new tenant, that suggests you are highly reliant on capital appreciation for your return, given the low cash flow.

However, I would question the idea that you will never again be able to afford real estate in Southern Ontario if you do sell.

Real estate prices have appreciated significantly over the past 10 years in Toronto—about 8% annualized. If that same rate of appreciation continued for the next 10 years, real estate prices would more than double (rising about 116% from today’s prices). Prices at that time would be nearly five times as high as they were 10 years ago.

If real estate prices are already unaffordable and interest rates are near all-time lows, how can prices more than double in 10 years as interest rates rise (as early as 2022)? Unless wage growth rises at the same pace or higher, which is also unlikely, I have a hard time imagining Southern Ontario will see the same pace of appreciation over the next 10 years as the past decade. That is just my opinion, though.

Alison, you’ve said you are concerned about slower real estate growth in Saint John. That is a reasonable concern. But compared to the high rent you are paying, buying may be well worth it over the long run even with modest appreciation.

You are also concerned about higher taxes in New Brunswick. At $75,000 of taxable income, a New Brunswick resident would pay about 25% tax, compared to a lower 20% in Ontario. At a higher income of $150,000, the difference narrows to just 2.5%. However, rents are currently about twice as high in Burlington as they are in Saint John, according to database company Numbeo’s cost-of-living comparison tool.

It sounds like you have a couple of big decisions to make, Alison. In a case like this, I would try to break a series of decisions into smaller decisions. Selling in Burlington and buying in Saint John do not need to be all-or-nothing choices. You may choose to do one or the other, or both.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.