Paul* and Marie* are retired and live in a three-story house in Beloeil, on the South Shore of Montreal. As they have just passed the 70-year mark, they soon plan to sell it and move down to a smaller location.
The situation
The couple finds themselves facing a dilemma that many people in Quebec are probably familiar with.
“Although we are in good health at the moment and in a relatively healthy financial position, we wonder what to do if we sell our residence,” says Paul.
The couple would like to move to Bromont, in a new condo with two bedrooms and two bathrooms, on one level. So far, the picture is clear. But you have to choose one of two options: rent or buy?
“We realize that the proceeds from the sale of the house, well invested and combined with our savings, would greatly help pay the rent. But we know full well that all these rent payments will go up in smoke over the years,” analyzes Paul.
And these rent payments are not trivial. The type of condo the couple is looking for rents somewhere between $2,500 and $4,000 per month in Bromont.
Paul and Marie are certainly not the only ones to ask this question, and obviously the answer varies depending on each person’s financial situation.
In their case, it seems at first glance that they could opt to rent or buy without taking any risk. They estimate they could sell their house for $550,000, which would allow them to buy a condo without a mortgage and maintain a lifestyle similar to the one they currently have.
They do not live beyond their means. By combining their various income sources, the couple has gross income of $101,320 per year, while they spend $78,000 per year.
Together, Paul and Marie also have several hundred thousand dollars in savings.
Paying rent, even a large one, doesn’t seem too risky to factor into this financial landscape, especially considering that selling the house would add $550,000 to their savings.
It’s easy to say that both options are possible…but harder to determine which would be better.
We submitted the case for analysis to a financial planner.
The numbers
Paul, 71 years old
- Income: $80,200 (i.e. $57,000 of indexed pension income, $18,000 of QPP and PSV as well as $5,200 of withdrawals from his RRIF)
- RRIF: $104,000
- TFSA: $106,000
- Non-registered GIC investments: $405,000
- Savings account: $55,000
Mary, 70 years old
- Income: $21,120 ($16,800 from QPP and PSV as well as $4,320 in withdrawals from his RRIF)
- RRIF: $80,000
- TFSA: $35,000
- Savings account: $10,000
Non-financial assets
Residence: $550,000
Passive
None
Current budget
- Couple’s income (gross before tax): $101,320
- Main annualized disbursements: $78,000
Analysis
Matthieu Leclaire, financial planner, vice-president of private management at Optimum investment management, analyzed the file.
From the outset, the good news is that Paul and Marie have a financial situation which actually allows them to do what they want. Both renting and purchasing a condo would offer them a peaceful life, confirms the financial planner.
It remains interesting to know which one is the most advantageous from a strictly financial point of view.
PHOTO ROBERT SKINNER, LA PRESSE ARCHIVES
Matthieu Leclaire, financial planner, vice-president private management at Optimum investment management
To make his calculations, Matthieu Leclaire used the following data.
In scenario A, the couple sells their house and buys a condo of the same value, i.e. $550,000, which is consistent for the type of product sought. The value of the condo increases by 2% per year, a tax-free return since it is a primary residence. At the same time, maintenance and co-ownership fees are estimated at 1% of the value of the condo, the same goes for property taxes.
The cost of living remains the same as when they had their house, with maintenance costs transferred to the co-ownership fees and maintenance costs of the condo.
In scenario B, the couple sells their house and places the $550,000 the transaction brings into a balanced portfolio that provides them with a 4% taxable return. He saves approximately $11,000 per year in maintenance costs and municipal taxes, but he becomes the tenant of a condo at $2,500 per month, which adds to him annual expenses of $30,000 from the first year, which will then be indexed with inflation (2.1% per year).
Scenario C is the same as the previous one, but with a more luxurious condo, which rents for $4,000 per month, or $48,000 per year.
Purchase wins
From a strictly financial point of view, using the data mentioned above, it is the purchase that would benefit the couple.
Calculation software taking into account the couple’s entire financial situation, including taxes, makes it possible to establish that in five years, in 2029, the couple’s total net worth would amount to:
- $1,470,034 if he bought a condo (scenario A)
- $1,285,752 if he rented a condo (scenario B)
- $1,162,469 if he rented a luxury condo (scenario C)
The gap widens over time. In 10 years, in 2034, it would rather be a question of:
- $1,598,362 if he bought a condo (scenario A)
- $1,275,115 if he rented a condo (scenario B)
- $1,031,536 if he rented a luxury condo (scenario C)
As the couple’s income easily covers their cost of living and their assets would allow them to pay for RPA housing regardless of the scenario they opt for, the choice will therefore be influenced, among other things, by the inheritance that both wish to leave behind. .
Do they prefer to live as tenants, with virtually no maintenance concerns, even if it means leaving less money for their children? Or do they want to embark on the adventure of co-ownership to leave an asset? The choice is theirs.
Some logistical remarks
However, the financial aspect is only one of the variables to take into account when making the decision. Matthieu Leclaire raises some logistical points which could instead convince the couple to opt for rental.
“The only fear I would have at this age if they choose to buy a condo is that it’s not that easy to sell. There are often several for sale in the same building. If one person in the couple has to enter an RPA and the condo does not sell quickly, they can wait a long time,” he emphasizes, specifying that it is less difficult to get rid of a lease.
If they keep the condo for the rest of their lives, it’s not necessarily the most pleasant legacy to leave – especially since Paul and Marie both have children from previous relationships.
“Does the estate want the condo? If it’s not easy to sell, there’s insurance to pay, condo fees, two families to divide it between, it can create chaos. Renting offers more flexibility, and access to capital, which is not tied up in bricks,” he adds.
That said, Matthieu Leclaire congratulates Paul and Marie for thinking about the question now, before possible pitfalls on the health side. “It’s a good decision to plan when you can. The worst decision is when it’s imposed on you. It is very hard for a person to have a change imposed on them that they did not choose. It’s easier psychologically [maintenant] that if an accident or illness happens, that a person becomes a caregiver in a two-storey house, that must also be sold…”
* Although the case highlighted in this section is real, the first names used are fictitious.