Lifestyle | How to enlarge the chalet and reduce expenses?

The two retirees live in their tiny chalet while maintaining a small condo in town, available for rent. Can they finance the expansion of their living environment?

Originally, the two women wanted to acquire a chalet to rent out.

“We wanted a second income,” says Carole*. We searched for a long time. »

But Carole and Michèle* fell under the spell of the small wooded plot and decided to keep it for themselves.

Six years ago, they sold their Montreal house and moved permanently into their chalet.

The chalet, whose price of $260,000 had been financed from their Montreal property, then found itself mortgage-free.

To maintain the security of a pied-à-terre in the city, they bought a four-room condo, paid $399,000 and mortgaged it to the tune of $172,000.

Two years ago, they undertook a rejuvenation of the chalet’s kitchen and essential insulation work, the cost of which was $40,000 added to the line of credit.

Because we are talking about a chalet and not a country manor.

“Two very small bedrooms, one of which contains the washer and dryer,” describes Carole. A very small bathroom whose door closes almost on our knees. »

Knees that are feeling the effects of being in their sixties – they are both retired.

“We are caught up with all kinds of costs,” she said.

By increasing the price of firewood and the contribution to the lake residents’ association, for example.

Monthly chalet expenses are $715, including snow removal. “But it’s certain that groceries are not included in that,” points out Michèle.

Nor the expenses of their car dating from 2014. And everything that makes up a life.

“This year, we decided to rent the condo because we were just arriving,” explains Carole.

Renting the condo and its parking space brings them $2,275 per month.

With mortgage repayments, property taxes, condominium fees, electricity and insurance, it costs them around $2,400 per month.

To provide more comfort to their living environment, they wish to enlarge their chalet.

“We would like to have a bathroom whose door does not close on our knees. We would perhaps like to have slightly larger rooms. »

The plans and specifications they had drawn up estimate the work to cost between $150,000 and $200,000.

“But where to get the money? », asks Carole. “Is it the right solution to keep the condo for rent? Could we take advantage of the increased value of the condo to sell it and buy smaller, just a pied-à-terre? We do not really know. »

Due to their age, they would prefer to maintain a Montreal base close to services.

Aged 67, Carole receives income of approximately $18,400 per year, mainly the RRQ and the PSV.

“I add $1,000 monthly by drawing from my RRIF,” she says. I will only be able to do this for a few years. It runs out quickly and my partner doesn’t have any. »

At age 65, Michèle receives a retirement pension of approximately $60,000, plus QPP and PSV benefits.

Are they too big for their chalet?

THE ANSWER

Carole and Michèle are not in a precarious situation, immediately observes financial planner Émile Khayat, senior regional director at TD Wealth Management.

Their budgetary situation has stabilized since they rented their Montreal condo.

“But on the other hand, it goes a little against their idea of ​​having a pied-à-terre in Montreal: they cannot live there,” he emphasizes.

Furthermore, even when renting it, the condo is in deficit.

“If we don’t change anything, they will be able to survive, as they say, until the end of their life expectancy,” notes the planner. But there will be a deficit every year from the 8^e year. »

Under these conditions, they would not be able to undertake the planned renovations, “which basically is their first wish”.

And because their condo is rented, they do not realize their second wish of a Montreal pied-à-terre.

Furthermore, they will eventually have to replace their 10-year-old car before it costs too much in repairs. Or that she leaves them stranded on a winding country lane.

In this regard, our advisor anticipates the acquisition of a $25,000 vehicle within two years, “which adds further pressure on expenses”.

In addition, he notes that the current debt of $40,300 for work already undertaken has not been repaid. The monthly payment of $254 is only used to pay interest.

To further add to the pitfalls, they will undoubtedly have to renew the condo mortgage loan shortly, at a rate likely much higher than their current rate.

Conclusion :

It is true that they hold interesting assets in their two properties.

“But it’s not cash that they have available to do what they want,” he says.

How to liquefy this financial rock?

Sell ​​the condo

The first solution would consist of taking out a loan guaranteed by the equity of one of the two properties. But who says loan says debt and interest costs.

“The other option, which is the best, is to sell the condo in Montreal. »

In any case, “it is an asset that is neither usable nor profitable”.

Once the $170,000 mortgage balance and a real estate broker’s commission are subtracted, the estimated market value of $470,000 would still leave them with a profit of just over $275,000.

The property having never constituted their principal residence, half of the capital gain of $70,000 will however be taxable. The two women will be able to cover it by each making a contribution of approximately $13,000 to their RRSPs.

The resulting sum will still be sufficient to pay for a large part of the planned renovations, repay the $40,000 line of credit and purchase a $30,000 vehicle in cash.

“And at the same time it saves them from having to renew the condo mortgage in a year at a rate twice as high. »

A slight budget deficit sets in in the seventh year, which forces the two spouses to draw on their retirement savings (this is their custom), but they reach 96 years old with still comfortable assets.

A new chalet

But is this the optimal solution?

This is where Second Avenue meets a fork.

The planner suggests instead also selling the chalet and acquiring a new country property already equipped with the desired dimensions and amenities.

Given the renovation costs, “it would most likely cost less,” he observes.

By adding $125,000 from the sale of the condo to the $475,000 from the current chalet, they could acquire a property worth $600,000, “perhaps not necessarily on the same lake, but which could still have a neighborhood just as pleasant “.

They would thus avoid the inconvenience and stress of a major renovation.

In this scenario, it’s in the 13^e year that the budget deficit appears, which brings them to 96 years with assets slightly higher than the previous scenario.

And the pied-à-terre?

However, this solution does not meet their desire for a pied-à-terre in Montreal.

“My suggestion is to simply rent as needed,” says Émile Khayat.

“If they really need to live in Montreal for health or other reasons, they could decide to rent something very reasonable, around $1,200 to $1,500. »

Nothing would force them to rent it long term if the needs are temporary. And if they are permanent, they will then be able to sell their chalet and come back to acquire a new nest in Montreal. It includes this expense in both scenarios.

The scenario of purchasing a new chalet remains financially more advantageous (and undoubtedly less stressful) than that of renovating the current chalet. But since the two avenues bring the two women safely to the end of their lives, they will be able to let their hearts speak.

* Although the case highlighted in this section is real, the first names used are fictitious.