The family home is the most valuable asset for most families. With home prices skyrocketing in cities across Canada, it can be tempting to tap into the equity in your home. While some people have gold-plated government pension plans, a lot of people don’t. If your major source of income in retirement are government benefits likeCPP, GIS or OAS, and it’s not enough, tapping into the equity in your home is worth considering, especially if it means leaving the workforce and enjoying retirement sooner. Here are three ways to unlock your home equity in retirement.
If you find yourself with an empty nest – your children have moved away from home, leaving you with a big, empty house – downsizing is worth considering. Downsizing from a house to a condo is a popular option for seniors. It’s ideal for those looking to access the equity in their house and no longer deal with the responsibilities and expenses of a house (i.e. snow shoveling, yardwork, repair and maintenance, etc.).
Downsizing makes the most sense when you’re able to pocket a decent amount of money (at least $100,000). When downsizing, don’t forget about closing costs, the transactional costs of real estate. Closing costs typically amount to between 1.5 percent and 4 percent of your home’s value. Examples of closing costs include land transfer taxes, commission, legal fees and disbursements, and utility and property tax adjustments. Do the math ahead of time to make sure downsizing is a wise financial decision.
In Vancouver, Canada’s most expensive housing market, laneway houses are an option worth considering for seniors looking to downsize. Laneway houses offer the same features of the family home, just on a smaller scale. Something to be aware of is you can’t purchase a laneway house outright – you’ll need to rent it from a homeowner.
For seniors who prefer to stay put in the family home, but still want to access the equity in their homes, a reverse mortgagemay make sense. A reverse mortgage is a loan for singles or couples age 55 or older. The loan is secured by your home equity. This option works best for anyone who’s built up substantial equity in their homes. The major advantage to a reverse mortgage is that you can stay put in your home and live there until you pass away. When your house is eventually sold, any money owed to the lender is repaid at that time. The major downside is that you’re using the equity you worked so hard to build up over the years. If you’re hoping to leave money to your adult children or charity, there may be little to nothing left.
If you’re not ready to leave the family home, sales-and-leasebacks is worth looking at. Although not yet widely available, a handful of these deals have been struck in Toronto, where the average price of a detached home goes for over a million. As the name suggests, under sales-and-leasebacks, your home is sold and leased back. Similar to a reverse mortgage, you’re able to access the equity in your home without moving. Since you’ve sold your home, this helps protect you should a housing crash occur. If you’re considering this option, make sure your lease is long-term and you’re able to end the lease early if your health deteriorates and you need to move into a long-term care facility.
Taping into equity in the family home is a major decision. It’s important to carefully weigh your options before making a move.
written by: Written by Sean Cooper
Sean Cooper is a Pension Analyst with a global pension and benefits consulting firm. He is a financial journalist with articles featured in major publications, including the Toronto Star, the Globe and Mail and MoneySense. His areas of expertise include pensions, retirement and health benefits. He has made several media appearances, including Bell Media, Newstalk 1010 and CTV. Follow Sean on Twitter @SeanCooperWrite and check out his personal finance blog at www.seancooperwriter.com.
Are Reverse Mortgages the answer if you want to stay in your home and unlock some of the equity in your home.
Chris Newell, from Master ASA talks about Sell ‘n STAY and why it is a great fit for some seniors. Designed for Seniors who want to Age in Place Sell ‘n Stay is unique way to unlock your equity and convert your ownership to tenant. Sell ‘n Stay has been used since 2013.
Below is the link to the Danielle Smith Radio Show.
Danielle always loved talk radio. And she is very excited to have her own show on her favourite news talk station. Join me from 12:30 pm to 3:00 pm every weekday for some lively debate and meaningful discussion on the issues that matter most to Albertans. We have so many things to talk about from the federal election to the future of Alberta’s energy industry, the global economy to Donald Trump. As a former politician and political commentator – I’ve seen the world from both sides. And I’m looking forward to seeing it from yours.
You can listen live on the NewsTalk770 website by clicking here.
Sign up for podcasts by clicking here. Below are links to my latest Podcasts:
How to exit the housing market without exiting your house
Let’s say you’re looking to get out of the housing market and pocket your wealth.
One option is obviously to sell, but then you have to either buy another place or rent. What if you could just lease back your own property?
It’s an unfamiliar concept in the residential housing market but a fairly common one in the commercial property sector. Most of the major banks, for example, sold off their property holdings long ago with the proviso that they could stay put for the length of the lease signed.
It’s called a sale and leaseback and now a group of Toronto realtors, who say they are specialists in dealing with seniors, are bringing the concept to the residential market. The group says they have already structured 15 deals with hopes of more to come.
“That’s kinda of the whole point of it, (not moving). We’re looking at seniors but others too,” said Chris Newell, who works with fellow realtors on a product called Sell ‘n Stay.
Seniors are a prime focus of the sale and leaseback group because they often need more money for retirement but don’t want to leave their homes. Those same seniors have been driving the reverse mortgage market, which also allows people to stay put in their homes but involves borrowing against future equity.
Reverse-mortgage advocates will tell you they’ve got the better product because it protects homeowners, whether prices are rising or falling in the market. A reverse mortgage lets you draw money out of your house with a promise to live in it for forever, with money owed on what amounts to a loan repaid out of the equity when the house is eventually sold.
“If there is no money left (from the equity), it’s our problem not yours,” said Yvonne Ziomecki, senior vice-president of marketing and sales at HomEquity, the leading provider of reverse mortgages in Canada. Under her program, you can extract up to 55 per cent of the value of your home, albeit at a hefty rate by today’s standards of 4.99 per cent. Plus, you have to pay upkeep and property taxes on your home.
The key advantage of selling your home and leasing it back might be that it allows you to exit the housing market without moving, leaving you unexposed to a crash. In Metro Vancouver and the city of Toronto, where the average price of a detached home is $1.8 million and $1.2 million, respectively, that’s no small consideration.
“What we are trying to do is a matchmaking between the investor and the homeowner,” said Newell, who lines up investors through real estate investment clubs and contacts. His longest leaseback has been 10 years.
Investors are generally looking for stable cash flow and also a chance at capital appreciation. Sellers want to make sure they have a rock solid lease that will allow them to stay in their homes for the prescribed time, though those leases often have an escape clause should the renter become ill.
The realtors hooking up these deals are getting their typical commission, about five per cent in Ontario, which is split evenly between agents acting for buyers and sellers.
Gerald Miller, a real estate and condominium lawyer at Gardiner Miller Arnold LLP, says he hasn’t seen deals like this, but says a key consideration will be the language in the lease.
“You can contractually do anything as long as it’s not illegal,” said Miller, adding that, in Ontario, the investors would not be able to evict a tenant who had a long-term lease, even if they wanted to move into the property themselves.
But, he cautioned that someone renting could find themselves out of house and home if the investor buying the property defaulted on a mortgage. Although Miller hasn’t seen these deals in residential property, he says that in commercial property mortgages any tenant “postpones their interest in the lease” to any lender. A tenancy with rights above any mortgage would make it harder to get financing.
Another friction point might be the actual negotiated rent. Based on achieving a four per cent return on a $1 million home, an investor would be looking to capture $50,000 in annual rent once operating costs like taxes are thrown in. A monthly rent of close to $4,200 is probably more than some people want to pay — even if that is the going rate to let a home.
“You’re not getting that type of money in rent,” said David Batori, the broker of record with Toronto-based Re/Max Hallmark Batori Group Inc. “You’d need $6,500-a-month rent for a $1.5 million house (in the city). It only costs $4,000 to rent that house. Rents just haven’t caught up with prices. The problem is, once you got up the price spectrum, people just say they’ll buy a place.”
Craig Alexander, vice-president of economic analysis at the C.D. Howe Institute, says the price gap illustrates how out-of-whack housing market prices have become in comparison to rental markets.
“Given how high home prices are relative to rental costs, the buyer won’t accept such a low return if they only get the equivalent rental rate. This illustrates how unbalanced the real estate market has become in the highest priced markets — with Vancouver and Toronto being the obvious examples,” said Alexander.
Author Don Campbell, founder of the Real Estate Investment Network, said sales-and-leasebacks hasn’t become a major strategy yet but acknowledges that some homeowners want a way to get their capital out of their homes.
“We are seeing different ways to do that,” he said, adding that there is a lot of inter-generational wealth transfers. “A baby boomer will renovate a house, create a secondary suite and sign a lease. They sell the home to the kids, probably lower than market price, and then rent from their kids (so they can carry it.)”
He says that in Vancouver’s pricey real estate market, laneway houses have become more common and are often used for seniors downsizing and looking to live on their property.
The bottom line, says Benjamin Tal, deputy chief economist at CIBC World Markets, is that people want to figure out a way to get the wealth out of their house.
“I think there is a market for anything that allows you to make some money without forcing you to move out of your house,” Tal said.
Illustrations by Chloe Cushman/National Post
How many years did you stick with the house, paying mortgage, maintenance, taxes and so forth. Now with Sell N Stay …combined with certified financial income planning, we can together ensure your Money is going to stick by you. This will become Sticky Money …to assure your Income for Life!
07 Apr 2015
By Lee Strauss
Investing in cash-flowing real estate is obviously a benefit for an investor, especially if that investor holds onto the property for a long period of time. Every cash-flowing property has three income streams: cash flow, mortgage pay down, and the appreciation of the property.
Cash flow: The rent collected, minus the expenses. A modest cash flow on a single-family home in any of the large Canadian markets can vary, but let’s use $250 a month as our example. Multiply that monthly cash flow of $250 across 10 years of owning the property: that’s $30,000!
Mortgage pay down: All the while you’re holding a mortgage on a property, it’s slowly getting paid down by your tenant. When you sell the property the difference from the first day you got the mortgage until the day you sold the property is yours in the form of equity.
As an example, let’s use a $300,000 purchase price with a 20 per cent down payment, a three per cent interest rate, a 25-year amortization and a mortgage of $240,000. In 10 years, the mortgage amount would be $206,008, a difference of $33,992.
Appreciation of the property: The third stream of income and usually the largest increase to an investor’s wealth. Historically, real estate appreciates over time. Let’s say you buy a property for $300,000 with a modest appreciation of four per cent per year – in 10 years the property is worth $426,990. Congratulations, you have just earned $126,990 in equity.
When all three of these income streams are added together, the investor would have a financial gain of $190,982. Not bad for a 20 per cent down payment of $60,000. Actually, when you calculate the return on investment of the actual money invested (which is only the down payment of $60,000), that is a 318 per cent, or 31.8 per cent per year, return on your money.
I honestly don’t know where else you could find a return that good. Please take into consideration that this is just an example and, of course, there are always unforeseen variables that can cause your returns to fluctuate, such as: vacancies, repairs, interest rate fluctuations, etc. Also, appreciation rates can fluctuate, which is why it is imperative to buy your properties in areas with strong economic fundamentals.
Having many properties provides the investor with many benefits. So ask yourself this question: What if I owned multiple cash-flowing properties? After reading this article and going over the examples provided, you can answer this question. If an investor can benefit substantially from holding one property for many years, multiply these gains – to put it simply, the more properties held, the better off the investor will be.
Now for the downside. As any seasoned investor knows, issues with your properties are inescapable, and regardless of what they are, they usually do come at a cost. Just as you would multiply the returns on your properties, you may also have to multiply your problems. The question you have to ask yourself is: How many years can you stick it out?
Lee Strauss is an investor based in Kitchener, Ont.
Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage. Click here to get help choosing the best mortgage rate