The downsizing debate
When you sell the family home, is it better to buy or rent? There’s no easy answer, so Sage60 addresses the pros and cons of each.
Moving to a smaller home can reduce maintenance, but choosing between renting and owning calls for careful consideration.
Renting versus owning? It’s a question that comes up a lot as retirees decide to unload the large family home and streamline their domestic responsibilities. But soon after that decision is made, the question becomes whether you should sell the house, free up some capital and rent, or put the proceeds from your house sale into a condominium.
Either option likely means no more snow shovelling, lawn mowing or maintenance. But if you choose to buy a condo, or a strata as they’re known in B.C., that option comes with condo fees that can be hefty and can change if a maintenance problem in the building surfaces. After all, condo buildings require roofs, too. Choosing to rent an apartment instead comes with a lot more freedom and generally a much lower price, but renting comes with some risks as well.
“There’s no right or wrong answer — no absolutes — but there are some advantages and disadvantages,” says Imran Syed, managing director of Brandenburg Capital Strategies and Brandenburg Private Wealth.
One challenge of renting is finding the right place.
“Unless you get a building that is owned by a corporate entity that’s always going to keep it as rentals, you run the risk of being relocated when your lease comes up,” Syed says, adding that he’s seen this happen with clients in privately owned homes when landlords change their minds about how they want to use their property. As such, he always advises renters who are happy with their unit to sign a two-year lease at least and if they have a great deal, to go for an even longer one.
Syed says an advantage to choosing to rent an apartment is that freeing up housing capital allows retirees to give some money to their children and see them enjoy it while they’re still alive. That may entail funding their children or grandchildren’s education, giving their children a down payment on a house or helping them with childcare costs.
On the condo side, a condo offers the reasonable stability of a real estate investment. But Syed says people don’t always realize that selling a family home in the suburbs might end up giving them the same amount of cash they need for a condo closer to the core. Moving to the country is a strategy that usually results in more capital gained, however. There are also considerations such as how your condo compares to your home in terms of finishes.
“They get into a condo and say ‘My kitchen was so much nicer in the ’burbs,’ so they renovate the kitchen,” Syed explains. “And maybe the large, architecturally desirable furniture that they had in the suburbs doesn’t fit in their new place so they have to buy smaller pieces, and then, if they can’t part with the bigger ones, or think they’ll get pennies on the dollar for them in a resale, they end up renting a storage locker for them, [thereby incurring monthly cash outlay for something they can’t use.] It happens more often than you’d think.”
Syed says taxes are cheaper on condos than houses, but condo fees are often high and they never go down. He advises clients to always look at the quality of the building into which they’re considering buying.
“How efficient is it? Are the repairs up to date? What’s the reserve fund? All of these questions come into play,” he says. “There are also special improvement fees for things like changing all of the windows and the condo board can do that through a special addendum.”
Condo fees can go up a little or a lot — but they’re never going down, Syed says. Although the condo board has to be transparent with the finances, there is no cap on how much such boards can raise fees in Ontario, for example. Then there are the one-time fees for real estate transactions, such as moving costs and lawyers’ fees — and don’t forget the land transfer taxes.
“One thing that everyone forgets is the land transfer tax, which is the percentage that you pay for the privilege of having your new home’s title change to your name,” Syed says. “In Quebec, they call it the ‘welcome tax,’ but it’s anything but welcome. It’s a big, big number.”
On a $750,000 condo in Toronto, for example, the municipal land transfer tax is $11,475 and the Ontario land transfer tax is $11,475 for a total of $22,950. Land transfer taxes vary from province to province. In Quebec, it starts at 0.5 per cent of the price for the first $61,500; 1 per cent up to $307,800 and 1.5 per cent on anything over $307,800. Montreal has its own rates, which are higher.
Mortgages are another consideration in buying. Fixed mortgage rates have stabilized, but they are higher than they were in the recent past.
Renting an apartment, meanwhile, offers flexibility, especially if you plan to travel frequently. When renting, you really just have to lock the door when you leave. Renting also removes the burden of maintenance and unexpected repairs and it allows you to keep your capital invested rather than locking it into housing at a time when borrowing costs are still relatively high.
In short, renting keeps things simple and liquid. But, if a renter invests the proceeds from their home, they’re then exposed to market forces. That said, even at a reasonably conservative return, the gains on $1 million would cover the cost of a decent two-bedroom apartment most places.
Ultimately, whether buying or renting is the better choice comes down to what risks you’re willing to assume.
Jennifer Campbell is the editor of Sage and Sage60.
Sage60, the digital sister of Sage, delivers compelling stories on healthy aging, advocacy, and community.
Federal Retirees represents active and retired public servants, Armed Forces, RCMP, judges, and their families.