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June 27, 2017 | The Obvious

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


Stan and Mary are 62 and 58 respectively, live in a paid-for house he figures is worth $1.1 million, have crappy defined-contribution pensions and want desperately to retire. Or quit and find something else. “Got to be more to life that this,” says a guy who’s worked 23 years in the automotive parts business. (She’s clerking for an office full of real estate lawyers, and sees the writing on the wall. “Way less busy now.”)

Like most, they’ve shoveled the bulk of their net worth into the house, have scrawny, malnourished TFSAs and inadequate amounts in their pension plans – maybe $150,000 between them. But no debt. That makes them financial rock stars, compared to their adult kids. (“Boy,” he reflects, “are they ever screwed…”)

They want to sell the house, downsize and tell their bosses to shove it. Here’s the plan: buy a two-bedroom condo for about $650,000, invest the rest and live large. Then they talked to me. Big mistake, I said. Let’s do the math.

So, ditch the house. That’s a no-brainer, since their pensions plus CPP/OAS will hardly support a good retirement lifestyle in the big city they love. Besides, the place needs serious work over the next few years – the basement’s original, the roof sucks, Mary hates the kitchen and the furnace has a bad ‘tude. Property taxes are eight grand a year now and seem to keep rising. It’s all a drag – besides, there’s a big pile of money sitting there doing nothing.

Selling today (as opposed to three months ago) may yield a million, if they’re lucky enough to snare a buyer this summer. After paying 5% commission, that leaves $950,000. So now, downsize to a nice two-bedroom condo, or rent one?

If they purchase, and find something for $650,000, they’ll have to shell out $19,000 in double land transfer tax in the 416 along with the purchase price (because no bank is going to give them a mortgage as they enter retirement). Now there’s $280,000 left.

If that’s placed in a balanced, globally-diversified portfolio of low-cost ETFs with 60% in growth assets (equities and REITs) and 40% in fixed income (corporate bonds and preferreds, mostly), they should expect about 6% after any management fee (figure 1%, tax-deductible). The income generated from that would be $1,400 a month, mostly untaxed since it’s structured as return of capital payments. But, sadly, condo fees ($500), property tax and insurance amount to about $900 a month, leaving just $500 to party with.

Is renting a better option?

The full house proceeds of $950,000 similarly invested would produce (at 6%) about $57,000 a year, or $4,750 per month. Rent for a two-bedder (a nice one) in that hood is $3,000, and comes with no property tax bills, no monthly fees, cheap insurance and no special assessments. So, if the entire rent were paid for out of the investment returns, it would leave $1,750 a month for living, or actually grow the nestegg by more than $20,000 a year.

There’s also a strong argument that S&M would actually have more financial security by not buying – and likely more emotional stability, as well. After all, their investments would pay the rent, add to their wealth, and they’d still have almost $1 million in liquid wealth – accessible any time if their circumstances changed, if health costs materialized or they wanted to travel like upscale bourgeoisie nomads for five years.

And what of the risks involved with both scenarios? Each contain downside. Investment portfolios fluctuate in value month-to-month, and some people worry about that. But over time returns have been consistent. And while a rerun of 2008 is unlikely, even that storm passed relatively quickly for people with this kind of portfolio – a 20% dip for a year, then a strong recovery.

There’s a good argument real estate now carries greater risk. Asset values are at record highs while interest rates sit at record lows. As that relationship changes, property values will probably decline and along with them liquidity. Could Stan and Mary could get out if they needed the cash? A 20% decline (totally possible) would wipe away more than $130,000 in net worth – with none of the loss deductible. Ouch.

Meanwhile condo fees could increase. So could property values. There could be a special assessment to repair a salt-riddled parking garage, install new elevators or replacement windows. All of this would affect the property value, and none of it could they control.

How’s this even a contest?

It isn’t. Buying is emotional. Renting is logical. The real nut these kids now face is selling.

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June 27th, 2017

Posted In: The Greater Fool

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