Looking to downsize? Make the smart choice and rent

Are you an empty nester and looking to downsize? By selling your home at this stage of your life, you could tap into the enormous equity you have accumulated, invest the proceeds, and then use the income to pay for your monthly rent.

That’s like living rent-free!

The actual amount of money you could generate depends on the value of your home and the rate of return on your investment. For argument’s sake, let’s assume that you can net $800,000 on the sale of your house and then earn a modest 3 per cent annual return ($24,000).That would give you up to $2,000 a month to spend on rent. Since most rental apartments go for considerably less than that, you should be able to rent a great apartment in a great building, in the neighbourhood of your preference and still reinvest a portion of the interest income to maintain the principal.

After 28 years in their house, and, with their two children grown and living on their own, Benjamin Applebaum and his wife, of Toronto, did just that. “We had a big, five-bedroom house which we thoroughly enjoyed, but it was 85 years old and there were always headaches associated with owning, in terms of major repairs and maintenance,” said Applebaum. “We had always talked about selling it at some point in time. We felt that given the present state of the real estate market in Toronto that it was an opportune time to sell.” After looking at a number of townhouses and other properties for rent, the Applebaums stumbled on the apartment they ultimately rented – a huge, 2,500-ft penthouse that’s walking distance to work, with underground parking, a fabulous kitchen, a huge outdoor terrace and three bathrooms. Not your typical downsizing scenario, by any stretch of the imagination. “We did the math and were astounded,” said Applebaum. “ By investing the principle from the sale of our house, and compounding the interest, we are more than covering our annual rental expenses.

And the best part of it all is that we do not pay property taxes, heating, or monthly maintenance fees like we would in a condominium. Nor did we have to pay any transaction costs, like when buying or selling.

Most people do not realize how costly it is to live in a condominium. It’s true that underground parking in our climate is a perk – at my age, a necessity – but you can join a gym for a lot less than you would pay to have a fancy health club right in your building. And most apartment buildings have underground parking.”

A persuasive case for renting (vs. owning a condo) is also made by chartered accountant David Trahair, in his highly publicized book Cash Cows, Pigs and Jackpots: The Simplest Personal Finance Strategy Ever. Trahair argues that the way to wealth is less though acquiring assets, and more through improving cash flow. Trahair urges would-be condo buyers (like seniors, particularly those who might be tempted to downsize from a house to a condominium) to avoid the pitfalls of condominium ownership that include whopping monthly maintenance fees, property taxes, and potential special assessments (to pay for major repairs or poor construction). As a senior, you should be especially careful to avoid such unnecessary expenses at this stage of your life. For those who have just sold the family home Trahair advises “You sit on a ton of cash and you just rent.”

Wouldn’t you rather be using your capital for travel and other priorities than home maintenance? “At this stage of our lives, selling our home and renting was one of the smartest moves we could have made,” says Applebaum. It could be yours, too.