Many people decide to sell their homes when they retire. But what's the best option moving forward: buying or renting?
Quebec City real estate broker Marie-Hélène Ouellette offers both home purchase and apartment rental services. She feels that choosing between these two options is more than just a financial decision. "You first have to consider the advantages and disadvantages of being an owner versus a renter," she says.
"The biggest difference is in the level of responsibility and freedom. You're obviously freer when renting since you can leave when your lease is up, and you have less responsibility because the owner takes care of the maintenance work." But renters can also have less control than owners over things like decorating, repairs and renovations and even pets, and when you've been a homeowner for a long time, that’s not always an easy thing to handle.
Buying a house or condominium can also appear financially attractive because it's an asset that has historically increased in value over time. But keep in mind that real estate values do sometimes drop, and as a retiree you won’t have a lot of time to make up for a decline in value. And something else to remember: When you buy a new place instead of investing the proceeds from your house sale and renting an apartment, that money is tied up and not easily accessible should you need it.
Own or invest?
Josée Jeffrey, a Montreal financial planner and tax specialist, says that switching from home ownership to rented accommodation isn't necessarily a good thing for everyone. "Usually, people who are nearing retirement and selling their houses have already paid off the mortgage," she points out. "If they move to an apartment they'll have to pay rent.” As a renter, you won’t have to pay property taxes, but your landlord’s property tax expenses are built into your rent, and your annual outlay for rent is likely to be far greater than your former property tax bill. While you can cover your rent with the proceeds from the sale of your house, you can expect your rent to increase over time, taking an ever-greater bite out of your savings.
So, once again, buying or renting depends on what your objectives are. For example, investing a portion of the money from the sale of your house may be a serious consideration for you, especially if you're counting on it to be a substantial part of your retirement nest egg. The question is: Which is a safer investment, real estate or stocks? In this era of volatile stock markets and inflated real estate prices, there isn’t an easy answer, and the wrong decision can come back to haunt you. “A financial crisis can take a big bite out of your investments,” says Jeffrey.
She feels the ideal solution might be to sell your house and buy a cheaper one. That way, you're still a property owner but you also have money that you can invest. And there’s the added benefit of not having to pay capital gains tax on the proceeds of your home sale, if it was your principle residence.
André Lacasse, a financial planner with Services financiers Lacasse in Brossard, Que., says the value of the house you're selling plays a big role in the decision-making process. If, for example, you net $500,000 after real estate fees when you sell your house and invest that amount wisely (with an annual return of, say, 4.8%), you can draw a monthly income of $2,000 to pay the rent on a nice apartment without even touching your capital. But if you’ve netted only $150,000 from the sale, and assuming you could get the same rate of return on what would be a significantly smaller investment, you would earn only $600 a month, which probably won't cover your rent.
What about a condo?
Many buyers are attracted to condos, but our three specialists are not necessarily on board. "Some people feel it's financially beneficial to invest the proceeds from a house sale in a condo, but they sometimes forget they'll need to pay condo fees, which can be hundreds of dollars per month," says Jeffrey. These fees depend on the size of your unit and the amenities in your building, among other factors. For example, the average monthly maintenance fee for a Toronto condo, as calculated by condos.ca in February 2015, is $0.59 a square foot, which works out to $588 per month for the average-sized, 996-square-foot unit – and that doesn’t include parking or a storage locker. “In some cases [such as in some older buildings] you may also have to put money into a reserve fund and on top of that, unexpected repairs may force you to make special payments,” adds Jeffrey.
Once again, for many it's a matter of lifestyle. For example, Ouellette remembers a client who had decided to buy a condo but ended up changing his mind, discouraged by the long list of rules and tasks for owners. According to the Canada Mortgage and Housing Corporation’s Condominium Buyer’s Guide, condo rules typically cover such areas as the maximum number of occupants per unit, whether you can have pets, noise, parking, hours of use for amenities such as pools and exercise rooms, and the appearance and alteration of your unit.
Your choice may also depend on whether you intend to become a snowbird. “I also had clients who owned a property in Florida and spent several months there every year," adds Ouellette. "They weren't interested in taking care of another house or condo in Quebec and were looking for a rental."
Among all the variables around renting or buying in retirement, one thing is certain: One size most definitely does not fit all. A financial advisor can help you assess your personal situation and find the solution that best suits your needs.