Can you think of your home as an investment asset? Maybe.
When I sit down with a client to do a financial plan, I regularly get asked to include the sale of the family home in my projections.
Using the proceeds from the sale of the family home has become mainstream in retirement planning. It’s regularly considered part of the retirement plan. Sometimes it’s thought of as the whole plan and in other cases just the “back up” in case you outlive your investment savings.
There’s a good reason for looking at a home that way. It’s no secret that the Canadian housing market has done well for many decades. We’ve all heard stories from parents or grandparents who bought their home for $30,000 and sold it 40 years later for $500,000. But when grandma and grandpa sold, they had to move somewhere else.
With the proceeds from the sale of your home, you will need to buy, rent or pay monthly fees of some sort for shelter and potentially for care as well.
And that’s the major flaw in a retirement plan that relies on the proceeds from the sale of your home: You’ll always need somewhere to live.
How profits vanish
There are certain instances where you can make a tidy profit from selling your principal residence, for instance, if you’re relocating from an overheated housing market like Toronto or Vancouver to retire in Ottawa or on the east coast. Or perhaps you’re moving from a four-bedroom home in a trendy neighbourhood to a two-bedroom condo in the suburbs.
For the most part, though, these moves end up being lateral, where you pocket a small percentage of the proceeds or even where you downsize only to end up paying more for new accommodations than you made!
For example, I have a client who loved the idea of a turn-key solution where he could travel more in the winter, spend time at the cottage in the summer and not have to worry about snow removal or lawn maintenance. These are attractive selling features of a condo, but you pay for it via condo fees and the unknown maintenance and repair fees that come up from time to time. This can end up costing you the profits from selling your home.
Another client was hoping to downsize from a three-bedroom family home to a bungalow. However, the demand for bungalows is high among the growing population of aging boomers, and bungalows are in low supply. As that client discovered, what happens when demand is high and supply is low is that the price goes up.
Reverse mortgages
One more thing to note. There’s a lot of hype around reverse mortgages now. This is where a financial institution agrees to loan you a portion of the equity built up in your home. You don’t have to pay it back until you move, or when you die your estate pays the amount back. While this might be a good option in some situations, there are barriers: high start-up costs, higher interest rates than a typical mortgage or secured line of credit, and the amount you can access varies greatly depending on where your home is and your age.
Before you plan to use your principal residence to fund your retirement, make sure to speak to a Certified Financial Planner to determine if the decision is right for you. There may be times when it makes sense, but in my experience things are not always as they seem.
Originally posted June 23, 2017
The views expressed by the author do not necessarily reflect those of All Things Home. This article is provided as a general source of information only and should not be considered as personal investment or legal advice, or a solicitation to buy services. Consult your financial or legal advisor to ensure it’s suitable for your circumstances.
