Why older seniors should rent instead of buy
Story by: Ted Rechtshaffen | Financial Post
After 18 years of ups in many Canadian markets, you always should wear armour before telling someone to rent instead of buy. With armour firmly in place, I believe that there are times when this definitely makes more sense.
Don’t get me wrong. I believe that your principal residence is usually a great investment, and one with the obvious advantage of being an investment you can actually live in as opposed to just being a line on a statement. The biggest problem with buying a home is that the transaction itself can be very costly and depending on where you live, it can be very difficult to sell in a timely manner if you need to.
If we take a 76-year old-couple who are considering selling their current home and downsizing — one of the basic questions is are you looking to buy something new or rent?
Some people fear renting because they may be forced to move from a property. While this can be a legitimate concern, it largely depends on who you are renting from. If you are renting from an individual for whom this is their only rental or they are planning to take over the space personally at some point, then it is a real risk. If, however, you are renting from a professional property manager with a long track record, then the risk becomes very small.
In addition to this, “the Residential Tenancies Act is actually extremely helpful with respect to protecting the tenure of a tenant” says Michael Baum, a real estate lawyer in Toronto with the firm Harris, Sheaffer LLP. He goes on to say “landlords have very limited rights of termination even on expiry of term. This makes it very favourable for such a renter.”
For those who have been home owners for the past 50 years, it is sometimes an odd concept to consider renting. It is almost a point of pride. “I am a home owner, not a renter.” I understand that sentiment, and if it is important to someone then that should clearly factor in the decision.
But before letting pride be the driver of the decision, let’s look at a few facts:
- Prices can indeed fall and take years to recover. In 1989, the average sale price of a Toronto home was $273,698. In 1996 it had fallen over 27% to $198,150. It took 13 years for the 1989 sale price to be reached again. In Vancouver, a detached home cost $180,000 in 1981 and dropped 39% in just over a year to $110,000. It took 7 years for prices to recover to their 1981 level.
- You can easily lose $40,000 in land transfer tax, and other ‘special fees.’This depends greatly on where you live. In some places, this isn’t an issue. If someone in Toronto wants to buy a $1-million condo, they will pay $32,200 in land transfer taxes. In addition, especially with condos, there can be a variety of gas and electricity hook-up fees, development fees, deposit verification fees, that add up to several thousand dollars.
- What happens when you eventually sell the condo? The biggest thing is that you are faced with another set of real estate commissions for selling the condo that wouldn’t have existed if you rented. If you are paying 5%, then you would have $50,000 in selling fees on top of the money you might spend to prepare the condo for sale.
- What if you need to move for health reasons? This is a big concern. If someone’s health declines, sometimes there is a need to move fairly quickly. This doesn’t necessarily mean that a condo or house must be sold immediately, unless the sale is needed to free up cash flow. While in some markets, a sale can happen in a matter of days for a good price, in other markets it could take months, and if there is some pressure to get it sold, the selling price will likely take a hit – costing even more.
Based on the issues above, my sense is that you should really plan on living somewhere for at least six years if you are planning to buy a property. That will at least give some time to amortize the big costs of buying and selling. If you think there is a decent chance of being in a property for less than six years, then financially you are betting on strong real estate growth for it to make financial sense. While that is certainly possible, it is a financial bet that may not pay off.
There is no clear right or wrong answer on the buy versus rent discussion, but for those with greater uncertainty over the next five to 10 years, you may want to consider renting for financial reasons as well as greater overall flexibility.
Ted Rechtshaffen is president and wealth Advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning. firstname.lastname@example.org