Selling the family home to make a profit and then renting it out? better not
If homes are investments, buying is only half the battle.
You also need to think about selling, a topic that will spark a lot of conversation this year among baby boomers who have been accumulating equity over the past few decades and are wondering just how low house prices are.
Here’s a plan for adventurous boomers to think about: You sell near the top of the market, find a place to rent, and then watch the market. Later, at your leisure, you assess whether to buy back at an attractive price or to continue living the life of a tenant.
There is an obvious appeal here in the fact that selling now would result in a huge profit if you had bought decades ago. But there are also financial and lifestyle risks to consider and, at present, these outweigh the benefits of the sell-and-let strategy. Avoid it unless you have significant financial resources and are okay with uncertainty about where you live.
The math of housing makes a great argument for selling and renting. The national average resale price for homes has nearly quadrupled over the past 20 years, according to figures from the Canadian Real Estate Association. The average prices in 2001 and 2021 were $172,122 and $687,990 respectively.
Sell now, deduct a real estate commission and closing costs from that 2021 national average resale price and let’s say you end up with $645,000. Invest your net proceeds in dividend-paying stocks with an average yield of 4% and you end up with $25,800, or $2,150 per month. It’s money you can use to subsidize your rent until house prices come down.
Remember the taxes, though. Even with the dividend tax credit, someone with an income of $150,000 would pay a marginal tax rate of about 20-30% on eligible or corporate dividends. In a non-registered account, you might get $20,000 in after-tax dividends, or $1,666 a month.
Rentals.ca’s April Rent Report shows an average monthly cost of $1,889 for two-bedroom rentals across the country. Vancouver and Toronto took the top two spots for cost at $3,122 and $2,776 on average, respectively.
Will an average rent be enough for the kind of person selling a home to survey the market for a possible re-entry at a lower price? Probably not. So figure out a rough average of $3,000 to $4,000+ for something decent. Subtract your after-tax dividends and you’re looking at roughly $1,300 to $2,300 in monthly rental costs.
The housing market at the beginning of May is certainly losing momentum, and prices in Toronto have slightly declined from March to April. But we won’t really know if house prices will fall significantly until the effects of rising rates begin to compound later this year.
Bidding your time if you sell your home puts the proceeds invested from the sale of your home at risk, which is likely money you would use to buy back into the market after prices drop.
If the stock market continues its recent weakness, the value of your dividend stocks could fall sharply. A loss of 20% or more could occur in a few bad weeks. Your dividends shouldn’t be affected, but you’ll temporarily lose purchasing power on a future home.
Guaranteed investment certificates offer a 4% return, with no risk of losing money if you work within deposit insurance limits. But you need to lock in for at least three years to get that rate, and your after-tax return will be lower than dividends in non-registered accounts.
The greatness of renting is that you have a fixed cost per month, without exposure to the unpredictable and unavoidable costs of maintaining a house in good working order. But tenants have their own risks.
Maybe your landlord decides to follow suit and sell to secure a profit at what could be a peak in the market. Now you are looking for a new place after getting comfortable where you are. Or maybe your landlord needs to raise the rent to cover rising mortgage costs.
Of course, there is also the risk that house prices may not fall enough to make much of a difference, or that they will eventually rise again in a few months. If it turns out renting isn’t for you, then you’re now looking for ways to buy back into the housing market without hurting your finances.
Selling the family home now, renting it out and buying it back later has the potential to make you a financial legend at your own pace if all goes well. But there are so many uncertainties to deal with while you wait. Why impose this on you?
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