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Real Estate – Is now the right time to downsize?

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By: Vivien Sharon

It was my pleasure to host an exclusive event at Sotheby’s International Realty Canada in Toronto recently.

The subject was: THE BIG QUESTION: IS NOW THE RIGHT TIME TO DOWNSIZE?
Special guests included Ted Rechtshaffen, who discussed income & tax planning for Boomers and Ismail Barmania, a lawyer specializing in estate planning for Boomers. I discussed the real estate choices facing Empty Nesters planning to Downsize.

From a real estate perspective, here are 5 key concerns that Downsizers face:

  • What to do with all our stuff?
  • How do we prepare our home for sale?
  • Where to move to and when should we sell?
  • Will your next move be by choice or circumstance?
  • What is our house worth and can we afford to move?

What to do with all our Stuff?

That is one of the biggest concerns. If you are like most people, you’ve accumulated a lot of “stuff” over the course of a lifetime.

Quite often, with the exception of a few family heirlooms, neither adult children nor grandchildren will be interested in these items.

Here are a few ideas that will make the downsizing process easier:

  1. Make a list of your furniture and household possessions. Decide what things you want to take with you to your next home.
  2. What does your family want? The best way to handle any potential disagreements is to have family members work it out themselves.
  3. What to do with valuable items that neither family nor friends want? Depending on the value, an auctioneer may be your best bet. There are auctioneers, appraisers, valuators and other experts who are knowledgeable.
  4. What can I donate? There are many charities that are interested in donated items that can be picked up or dropped off, usually for a tax receipt.
  5. Who can help? Fortunately, there is a network of specialists such as transition specialists, (downsizers), movers, packers, home stagers, decorators, contractors, etc., who can simplify the process.

I understand your concerns first-hand. I downsized myself, 15 years ago from a large North York home to a city condo.

Specialized Real Estate Agents for the Boomer/Senior Market

In the past 20 years the idea of specialization by real estate agents has become very popular. There are agents who only work with Buyers, some only with Sellers. Then there are agents like myself, who have chosen to make Boomers and the Seniors market a speciality. I have specialized training in working with Boomers, Seniors and their families as a Master-ASA (Master-Accredited Senior Agent).

I have been trained in what is important to this demographic and the extra time that is required when contemplating a late-in-life move.

What has changed in real estate?

If you are like most Boomers and Seniors, you haven’t bought or sold real estate in many years. The basics of the business hasn’t changed, it’s still all about helping make your move (or your family’s move) as easy as possible.

Agency Representation

Prior to 1995 in Ontario and 1994 in British Columbia, all real estate agents were representing the interests of Sellers. This was confusing to Buyers, who thought the agent helping them buy a home was working for them, when in fact, they were working for the Seller. Since the mid-90’s, Buyers are typically represented by an agent they have “hired”, so there is no confusion as to whose best interests the agent is protecting. In all jurisdictions of Canada, a real estate professional is required to present you with a written explanation of how representation works, at the beginning of a working relationship.

Different Commission Models

Sellers pay the Commission to the Listing Brokerage (for Sellers) and also to the Co-operating Brokerage (for Buyers) upon closing.

When dealing with such a large investment as your home, which is also a huge nest egg, it would be penny-wise and pound-foolish to base your decision solely on the fee. As with professionals in all areas of life, you really do get what you pay for.

Who Pays Land Transfer Tax?

Buyers of houses and condos pay Land Transfer Tax when they purchase a property. Each province has its own set of rules when it comes to Land Transfer Tax. Sellers never pay. Your lawyer will arrange for land transfer taxes to be paid when the deed to the new home is transferred in your name on closing day. The cost of your land transfer tax is a percentage of your home’s value.

The Paperwork

There is a significant amount of paperwork when you embark on a real estate transaction, whether buying, selling or both. A real estate agent will orient you on all the required paperwork. The forms are standard on a provincial basis, so real estate lawyers will be very familiar with them.

Please contact me if you have any real estate questions or concerns. I am happy to help.

Vivien Sharon, BA, Master-ASA, Seniors Real Estate
Real Estate Broker
Sotheby’s International Realty Canada
vsharon@sothebysrealty.ca

The question on every Toronto retiree’s mind: Do I sell my house now?

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There are early indications that residential home prices in the Greater Toronto Area are starting to level off. Between changing mortgage rules, a new foreign buyers’ tax, and banks placing tougher standards on property valuation, there is definitely some downward pressure from many sides.

This possible peak often gets my older clients to think harder about their biggest asset. One of the most common questions I receive is, “Should I sell my house now?” This is often followed by “If I decide to rent or move to a retirement residence, how can I best fund all of the fees?”

While these questions can best be answered as part of a broader financial plan, here are my basic answers:

‘Should I sell my house now?’

The decision to move from a house to a condo or to a retirement residence should be driven by lifestyle more than money. It is extremely difficult to time any market, and the real estate market is no different. The time to sell the long-term family home is when you are ready to make that next step — physically, emotionally, and if necessary, financially.

The one concern is that people occasionally make the move from their long-term home later than they should. It really is best done before you are forced to move for physical reasons. Change is hard for everyone, and it can be a very emotional decision for some people. In my experience, if you are starting to seriously consider moving, it probably means that you should have done it a couple of years before.

‘Should I rent or should I buy something else?’

One of the biggest real estate costs is the transaction itself. From real estate commissions to land transfer taxes to staging costs to legal and moving costs, getting from property A to property B can cost you as much as 8 per cent to 10 per cent of the average cost of the two properties. This is effectively wealth that has disappeared. The only way to recover that cost is to own real estate that is going up in value, and to amortize it over many years by not moving very often.

This is crucial to answering the question of whether someone in retirement should buy or rent. My rule of thumb is that unless you expect to be in your new property for at least 6 years, you should definitely be renting. Like most life decisions, nothing is guaranteed, however, given your age and health, and expected plans, you should be able to make a pretty good guess at this question. If you are going to do an extra buy-and-sell transaction that could easily cost you over $100,000 in expenses in Vancouver or Toronto, you want to be fairly sure that your time in the new property will make it worthwhile.

‘How will my house proceeds pay for all of the new monthly fees I might face?’

If you move from your paid off house to a rental property or retirement residence, suddenly there are monthly expenses that you never had before. Nice retirement residences can now easily see fees of $4,000 to $6,000 a month. Rent on a nice condo will often be $2,500 to $3,500 a month. Obviously these are higher-end estimates, and each area of the country will have different costs. The key is, how best to fund these new expenses. Even if you choose to sell your house and then buy a condo, there could be monthly fees north of $1,000 a month.

Before the sticker shock causes you to stay in your house for another few years, the first thing to think about is how much of these costs are actually additional, as opposed to simply replacing current expenses. If your house taxes are $6,000 a year, and your average repair bill is $12,000 annually, that works out to $1,500 a month that you are no longer spending. In some cases, there are also utility bills covered in monthly costs — especially in a retirement residence.

For the sake of argument, let’s say that you are adding $2,500 a month in living expenses, or $30,000 a year.

Let’s also say that in selling your house, you cleared $1 million. This means that depending on tax rates, maybe you would need to generate 4 per cent or $40,000 of income on this portfolio pre tax to cover the extra $30,000 in living expenses — without touching the capital.

Here is a sample portfolio that we might put together for this type of goal:

• 15 per cent bonds — yields 3 per cent

• 15 per cent preferred shares — yields 5 per cent

• 15 per cent  TriDelta High Income Balanced Fund, mix of bonds, stocks and alternative income — yields 5 per cent (with some additional capital growth)

• 20 per cent Select Alternative Income Funds in Global Real Estate and Private Lending (with no Canadian real estate exposure) — yields 8 per cent

• 35 per cent Dividend Growth stocks — yields 3.5 per cent (with some additional capital growth)

• Total portfolio yield: 4.8 per cent

• Long-term capital gain expectation: 2.5 per cent

• Expected long-term return before fees: 7.3 per cent.

• Expected long-term return after fees: 6 per cent + (fees would depend on the overall size of portfolio managed and would be tax deductible).

It is important to keep in mind that this focuses on selling real estate to fund living expenses for the rest of your life. It doesn’t look at other savings and other expenses.

Is now the time to sell your long time family home? Only you can really answer that question. What I can say is that in the vast majority of cases, the monthly costs of rent or retirement home fees shouldn’t be holding you back from selling your home. The growth and income alone from your house sale proceeds (especially in Toronto and Vancouver) should cover you for life.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 6th June 2017.

If your retirement security is built on your home, now might be the time to sell

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If you’re a homeowner thinking about leaving work in the next few years, it may be time to cash in your lottery ticket (also known as your house) and trade it in for a comfortable retirement.

Across the country, but specifically in Vancouver and Toronto, the growth in house values has reached the point where, for many retiree homeowners, their house is by far their largest asset. It is not uncommon to see 75 per cent of someone’s net worth tied up in their home.

As a certified financial planner those stats make me nervous — especially if the person in this situation is a retiree. Here are five reasons why:

1. Concentration risk. If an investment portfolio is too heavily weighted in one sector, we can see the risks. For example, if you owned 30 per cent or more in energy and materials in 2014 and 2015, you were hurt badly. Now, what do you say about someone who has more than half of their entire net worth in residential real estate on one street in one city? That is a very high level of concentration risk.

2.buysell When house prices fall, recovery is very slow. In 1989 Toronto house prices dropped after a big rally. It took 13 years for prices to recover. When adjusted for inflation it took 20 years to recover! As a retiree, do you have 13 or 20 years to wait? The previous spike in Toronto took place in 1974. In that case it took 12 years to recover when adjusting for inflation. Predicting the fall of house prices has been a losing bet for several years, but when home prices start to fall, it can take many years to recover. You don’t want to be forced to sell at a time when prices on your biggest asset are down.

3. Uncertainty. Most people want as much certainty as possible in their retirement and estate planning. If you want very low risk on an investment portfolio, it isn’t that difficult to count on an average return of four per cent. The lower the risk, the lower the volatility. With house prices, you have no control. The value of your home could go up 10 per cent, go up five per cent or go down 10 per cent, and as a homeowner you simply ride the wave. If you want more certainty over your financial future, sell your house and put together a low risk portfolio.

4. Debt. This may not be an issue for some, but for those with debt on their home in retirement, there is an added risk. Today, the borrowing cost is very low, but IF housing markets turn down, it will likely be in part because borrowing costs have gone up. That combination of higher costs and lower equity can have a big impact on a retirement plan.

5. Maybe housing prices ARE overvalued. I am not in the real estate prediction game, but some pretty smart people (including economists with the OECD and IMF) are warning that real estate prices in Canada are overvalued by 30 per cent or more. In Vancouver, a house selling for $1.8 million today was selling for $1.2 million just two years ago. What if the house prices “crashed” to where they were just 24 months ago? That would take $600,000 out of your retirement nest egg. I know they have been saying it for a while, but at some point they will be right. If you are 45, then you might be OK riding out that storm and still selling at a great price in retirement. If you are 65 and thinking of downsizing anyway, that isn’t a storm you want to weather.

Despite all of this, from a pure financial standpoint, I can think of one very good reason to stay fully invested in your home. The benefit is tax. There is almost nothing in Canada today that is as good a tax shelter as your principal residence. Remember that 100 per cent of the capital gains in your home are tax-free. Having said that, keep in mind that this large benefit is only of value on gains. There is no tax benefit to losing money on your principal residence, but cashing in a big capital gain tax-free certainly sounds pretty good.

So, if you are feeling concerned about having too many eggs in the real estate basket, what are your options?

1. Sell and rent: While many don’t like the idea of renting after many years as an owner, from a financial perspective it can end up costing you very little when you subtract all of the real estate taxes and capital expenses that you regularly had to put into your house.

2. Sell and buy something much cheaper in the same city: This will allow you to cash out a good percentage of your lottery ticket while still owning property and benefiting from the tax advantages. One of the challenges with this one is that you will need to pay an extra set of real estate commissions, land transfer tax, etc.

3. Sell and buy less expensive property in a completely different location: This can be the move to cottage country, somewhere warmer or closer to grandchildren (as long as they don’t live in Vancouver or Toronto).

When it comes to your home, there are lots of opinions floating around and nobody has the perfect answer. However, when it comes to your retirement, if you are relying on something that many people say is 30 per cent overvalued today, now might be the time to reduce or eliminate that big risk.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 12th September 2016.

Why you probably shouldn’t ever want to own a cottage

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As you are reading this on what is hopefully a beautifully sunny and warm day, sitting on your dock on the water, what could be better than being at your cottage.

There is no question of how nice it can be, but do you really have to own it to enjoy it?

Occasionally clients ask our view on buying a cottage. This question usually leads to a broad discussion where the financial equation is only one part of the picture. Their stage of life, kids’ ages, desire to explore or stay put, comfort with property maintenance, and even their experiences growing up, play a big part in deciding whether to buy or not.
cottage
For me, I am pretty certain at this stage of life (with three school-aged children), we are not cottage buyers. I know that not everyone will agree with this opinion, but I know it is the right decision for me and my family. Here are five reasons why I won’t buy a cottage.

  1. Trying to juggle the summer plans of our kids leaves only two to four weeks of possible time the kids could be at the cottage each summer. At a different stage in life, cottage ownership could make more sense.
  1. We want the freedom to explore different parts of Canada in the summer (maybe even beyond Canada), and don’t want to feel that we are tied to one location. In addition, we can rent a cottage that is ideal for the age and stage of our kids — both in terms of water safety, and with an eye to places to visit within an hour of the cottage.
  2. I can’t fix anything myself. My wife is pretty good at it, but neither of us wants to spend our time away working on the property or even feeling guilty about what needs to be done. We want to enjoy it.
  3. Financially, there are better investments. Over the last 35 years, residential real estate in Canada has averaged a gain of 5.4 per cent annually. Over the same period, North American stock markets have averaged 10 per cent returns or more. If the growth is tax free on a personal residence, then the gap is smaller, but for a cottage there are usually capital gains taxes to deal with. For those who talk about needing to deduct investment management fees from returns, that can be true, but you would also need to deduct real estate taxes and non-capital expenses from the return on the cottage. Looking at the options, I would rather not lock up my capital in a cottage.
  4. Finally, no more freeloading friends and family to worry about. I know that many families love to invite people up to their cottage. It is often greatly appreciated. However, it can get very tiring after a while, and when it isn’t greatly appreciated, it can become a real weight on the relationship. When renting, you can occasionally invite people to join you, but they know not to expect the annual invite.

 
Reproduced from the National Post newspaper article 31st July 2015.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Renting during retirement? 10 cases where it might be right for you

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Home ownership is the deeply ingrained Great Canadian Dream. Adding to the dream is retiring as a homeowner without debt. Although that dream is alive and well, and something that most retirees hope for, there can be some very good reasons not to be a homeowner in retirement.

While renting in retirement may not be your goal, perhaps some of these 10 scenarios might get you thinking differently.

  • You can’t afford it. Either you have never been a homeowner because of the high costs, or you were a homeowner but simply needed the liquidity and access to the capital that was tied up in your home. While there are certainly ways to remain a homeowner and access some of the capital, the greatest access to capital is to sell your home.
  • You don’t want to carry debt in retirement. You can make a good case that having debt in retirement is just fine as long as you have home equity that is much larger than the debt. Having said that, it is understandable that many retirees don’t want the worry of debt. Usually the best way to achieve this is to sell real estate and use the capital to pay off debt (often debt still owing on the house).
  • You don’t want the responsibility of maintaining a house. Let it be someone else’s problem. It can be very nice to suddenly realize that the leaking faucet is no longer up to you to fix. It can be even nicer to know that the roof that needs replacing isn’t going to come out of your pocket (at least directly).
  • You don’t want to pay any more realty commissions and land transfer taxes. You may be at a stage of your life where health concerns are either a reality or looming larger. One less home purchase can save you tens of thousands of dollars by eliminating the money that disappears to real estate commissions and land transfer taxes.
  • You don’t want to be trapped in a home you can’t sell quickly. You don’t know how long you will be staying in your home. By renting, you have much greater flexibility to move, and with far fewer worries than if you own your home. This can be an even bigger worry outside of urban centres where it can take many months or even years to sell a home.
  • You want to spend more money while you are healthy enough to enjoy it. With a major amount of money freed up, you may feel more comfortable spending on vacations, cars, boats or other items that you have long dreamed about. Of course, this should be done with a long-term financial plan in place to ensure you can actually afford it. I have found that while many retirees can afford to do all of these things, “realizing” the cash in their homes often gives them the psychological comfort to start spending.
  • retire_rentYou want more diversification in your investments. While most people view their home as more than an investment, it can certainly be looked at as a large and extremely concentrated one. Let’s say someone owns a home worth $700,000, and they have a decent pension from work. They could very well have few other assets in their net worth. Maybe $150,000 in other investment savings. This person’s net worth is over-concentrated in real estate, and not just diversified real estate, but 100% in residential real estate in one location. By selling and investing the funds, they can now be much more diversified across a wide range of industries and types of investments.
  • You want to be able to test out different homes and places. Some people know they want to move to a condo. Some want a backyard garden. Some know the neighbourhood or city or small town they want to live in, some aren’t so sure. By renting you may be able to try out a few options to see which one is the best fit. I am not suggesting that moving is a fun or easy process, but it is a lot easier when you are just renting, as opposed to being an owner.
  • You may be needed out of town. Many retirees are happy to finally have their freedom and some independence from family. Others may want or need to move to be closer to children, grandchildren or increasingly elderly parents. Renting may allow you the freedom to spend significant time with family in other cities, without still being responsible for real estate back home.
  • You are spending less and less time at “home” anyway. Florida, Arizona, the south of France. Some of these places can be quite compelling in retirement. As you spend less and less time in Canada, does it really still make sense to own a home? By renting you may save a lot of money, especially if you are able to rent for only three or four months at a time. The monthly costs will likely be much higher due to the flexibility, but when compared to a full year of rent for a place that you won’t be in for months at a time, the cost savings and flexibility can be of great value.

Reproduced from the National Post newspaper article 27th January 2015.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

The newly rich: How your world changes when downsizing creates a windfall

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You may never have imagined yourself sitting on a financial windfall and wondering what to do with it but many older Canadians who have lived through the housing market’s finest hours are facing just that.

If the investment in your family home has paid off handsomely over your lifetime, there might come a time to lock in those gains. You could downsize and buy a cheaper home or condo — if you knew how long you might want to live in the property and if you don’t mind all the land transfer taxes and transaction costs.

9589919_sOr you could give yourself the flexibility of renting an equally nice home or condo.

The question is – what do you do with it, and what do you need to think about, when that big cheque comes from the real estate lawyer?

Here are five things to think about:

  • What is your new annual budget going to look like? You will have major savings on annual house upkeep and repairs and no more realty taxes. You will have major new expenses with your monthly rent. Will this end up costing you $40,000 more a year or only $10,000 more or is it closer to a break even scenario?
  • In order to cover off annual spending, how much, if any, do you need to draw each year from your non-registered investments? The key is not to think about how much income does this need to spin off, but rather cash flow. This income focus is a mistake that many people make, and it sometimes leads to higher risk investments and almost always in much higher taxes.
  • Based on your current situation, what is the chance of you outliving your money? What is your likely estate value and lifetime tax bill? These important questions may require help from a financial planner, but if you don’t already have a strong handle on this, now is the time to get it. Aside from peace of mind, having this knowledge will drive a number of decisions around your spending habits, investment strategy, gifting habits (to family or charity), tax planning and estate planning.
  • Your tax bill is getting very big, and you need to figure out how to make it smaller. In addition to being forced to draw 7.59% of your RRIF value (based on age 73), you are now suddenly taxed on income and realized capital gains on investments. If you earn 5% income (half Canadian dividends and half interest or U.S. dividends) on this portfolio, that works out to $35,000 of Canadian dividends and $35,000 of fully taxed interest and U.S. dividends. You could be facing over $20,000 in taxes that you weren’t facing before plus you could lose $6,700 in annual Old Age Security (OAS) payments. This is a little less painful if you are able to fully split income with your spouse, but can be very expensive if you are single.

 

The good news on the investment front is that you can structure the portfolio to generate much less income, cut  your tax bill, and possibly even keep your full Old Age Security payment in the process. Among the tools to help accomplish this would be:

  • Start with an investment portfolio that has limited exposure to interest income and U.S. dividend income in the taxable investment account. This will lower the amount of income that faces the highest tax rate.
  • If you are paying for investment advice, try and ensure that the investment fees are tax deductible. This will lower your overall cost and also lower your taxable income and can help with OAS recovery.
  • Consider Corporate Class funds that have low yields and can defer capital gains – or other income limiting investments.
  • Look at other tax sheltering ideas such as shifting some funds to tax sheltered insurance or using flow through shares with investment certainty (a locked-in loss) that is more than offset by government tax credits.
  • Look at gifting strategies as part of the overall plan – both giving to family and to charity.
  • How do you use your wealth to make the most of your remaining years? This is touched upon above, but it is really about sitting down and saying ‘what do I want to do now? What goals do I have for myself?’ Not just the bucket list idea, but what kind of values and relationships do I want to leave with my kids and grandkids and friends? Do I want to try to make a bigger difference in other people’s lives – either financially or through other things that I can do? When you suddenly have more liquid wealth at your disposal, it is a good time to take a step back and think about what it can allow you to do?

 

While the selling of your family home can trigger this type of review, it can happen in other situations as well. Often it is at a time of inheritance or in some cases when a retiree chooses to take the value of their pension as a lump sum. It can even be the much rarer scenario of a lottery win.

At all of these times of positive financial change, it is important to think about how it could change your lifestyle, how your tax situation changes, what type of advice you might require, and how it might allow you to positively impact others. These situations may never come up in your life, but if it does, it is often a once in a lifetime opportunity. Plan wisely.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 1st October 2014.

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