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Real estate investing for retirement?

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According to the Rob Carrick at the Globe and Mail Relying on your home to spit out cash is a recipe for disaster. With increased living expenses people have a lower percentage of their income to invest in their retirement, but increasing property values have led some to believe that their mortgage could be their retirement plan.

The average house price nationally in September was $277,470, which is about 50 per cent higher than it was five years ago. In cities like Toronto, Calgary and Vancouver, the average price was between roughly $350,000 and $527,000. It’s rapidly becoming clear that certain financial sacrifices are inevitable when you buy a home at those prices, and one of them may be putting enough away in a registered retirement savings plan.

The average price for a house in Canada is under $300k? Isn’t that quaint? With our high real estate values, I bet we all get to retire early! Unfortunately the article goes on to outline some of the reasons that housing is not the best bet for retirement planning:

Everyone loves the housing market during a boom — it’s no big deal as long as you regard your home primarily as a place to live. The harm is in getting grandiose ideas about how your home will help finance your retirement. In the Investors Group survey, 51 per cent of participants said they are relying on their home as one of their sources of retirement income. Among the baby boomers in the survey, 55 per cent said their home will be a source of funds in retirement (a total of 2,170 people participated in the survey, which was conducted last month).

The problem with using your home as a source of retirement income is that it’s a very inconvenient source of funds — you can’t take cash out unless you either sell or incur some debt through a home-equity line of credit or a reverse mortgage. “You have to be realistic,” Ms. Ammeter said. “The question to ask is, how are you going to realize on your investment in your home?”

Rent it out to the luge team for two weeks! Sell it to wealthy foreigners! Take out a giant home-equity loan and pass the debt on to your kids! I mean come on, it’s not rocket science, what with global warming I’m sure it will be quite comfortable to sleep in the parks year round in 10 or 20 years, so you sell the house and live for free in Stanley Park! If you hunt and trap squirrels for food you can probably live quite comfortably off the interest from your nest egg and have the confidence and joy that comes from being self-sufficient.

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solipsist

Thanks for the tips pope. You are right about the racoons. Kind of like a Mongol feast wherein there is an ox stuffed with a sheep, in turn stuffed with a lamb stuffed with a pheasant, stuffed with a quail, stuffed with quail's eggs.That's living.

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the pope

Hey solipsist – I like my squirrel boiled and garnished with those little packets of peanut butter you can get for free from the local greasy spoon. If you're too slow gettin' the swan eggs then you just gotta catch the racoons. They're a 2 for 1 deal if they've eaten the eggs!

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Anonymous

A giant fire?Wouldn't it be easier to require every liveable unit to be inhabited at least 9 months of the year? The house I moved out of has four empty suites that have remained empty for months.

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Anonymous

the only way vancouver can have affordable housing is if we had a big fire that destroys 1/2 of the city and we would rebuild with highrises 800storeys high like in hong kong and we all lived in one.

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chrisnott

The pope: Good point re downsizing. I know of a couple (somewhat 2nd hand info) who "downsized" from a 900K home on the north shore to a 1.1M condo downtown.

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solipsist

How do you fix those squirrels Pope? I like to grab the scrapin's from the plates at the Macaroni Grill, and fix 'em up in a squirrel fry. You can always find a nice hubcap to use for a pot down near where Georgia makes that turn.The swan eggs are pretty good in the spring too. You need to be quick though, lest the durned racoons get 'em first. I can't believe anyone pays anything to live here.

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bc_cele

bullish said… Those easterners just don't understand how much money you can make off of real estate here. Sure you can't retire on the price of a bungalow in Thunderbay, but we've got a whole different scene out here. Thunderbay? What does Thunderbay have to do with the price of tea in China? If you are buying a house in hopes of retiring then you may as well bet on the lottery, too.

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Anonymous

There are always going to be places that are a lot cheaper to live than Vancouver, so you'll be able to pull more money out of a house here that you would somewhere else.Yeah but you have to put the money into the house first.You're assuming that Vancouver RE is going to give above-average returns going forward, when the fundamentals indicate the opposite.You'd be better off renting and putting the rest of your money into a real investment. Or buy into somewhere cheap now, and move there later.

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WoodenHorse

Further to my above post:Something that really bothered me when I started to look at Vancouver prices was how Property just doesn't really provide a return in the way that other locations do. As I posted above, Incomes aren't way high here.This value isn't showing up in rental:http://tinyurl.com/mblf6And as I've posted here before, rents has been falling at 1% per year in real terms. When I've raised that question, ppl have said "Well….this is Vancouver…The mountains, the this, the that…etc." Is it really worth 400K additional?And don't forget, you can rent here and the cost isn't that much higher than other cities, so this additional cost is purely to be able to say "I own here" not "I live here". Is "own" vs. "live" worth that much?

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WoodenHorse

D_oush,Funny you should pick Thunder Bay.As you can see here:http://tinyurl.com/wodjgThey have a higher median family income than vancouver (roughly 10% higher), but an average price that is 20% of Vancouver's average price.http://tinyurl.com/y25lgrSince incomes are equal, is Vancouver worth 5 times as much? Is Thunder Bay that bad? (honest question. I've never been there)

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mohican

KenTo answer your question about how to find a financial planner. As a financial planner myself, I recommend you interview a prospective planner and find out how they approach planning, investing, debt management, etc. then find out how they make money. Are they commission based, fee based, salary, salary+bonus/commission? I would stay away from someone who is solely commission based, not that there aren't good commission based planners out there, but the reward for potentially steering you into high commission paying products rather than what is right for you is something that a lot of commission based planners I know struggle with.You have a good start when you say that you need to find someone you trust. That is exactly who you should look for and wait until you find that person. Ask other people you know about their planner… Read more »

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downtownguy

the pope – i agree with the article and you (to the extent that you adopt that reasoning). intuitively it makes sense that you will have some money left over when you "downsize". by that i mean from something valued at X to something valued at less than X. but to the extent that you plan to rely on that amount for your retirement – that is a fool's game.

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the pope

d_oush: Isn't that just a slightly more reasonable version of the 'sell your house and move into the park' argument? Are you forgetting that you have to put a lot more money into property here to hopefully get as much as you can back out of it later? How long does it take to pay off a house in Vancouver vs. most anywhere else in Canada?

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the pope

Downtownguy: The article touches on the 'downsizing' issue, but is fairly pessimistic about it:One idea you hear a lot is that retirees will "downsize" — sell their home in retirement, move to a smaller residence and pocket the money that is left over. There's no guarantee that downsizing will net you much cash, however.For example, you may end up wanting to move into a small house or condo in a pricier neighbourhood than you live in now, or you may find that the type of dwelling you see yourself living in after retirement commands a price premium. For example, you may not save much in Toronto by moving to a bungalow from a two-storey home.And particularly for the boomers, what if they all want to 'downsize' around the same time?

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downtownguy

Another way a house can help you is downsizing. Sell the big family house and move into a downtown condo. If the family house is paid off, you will have some equity to fund your retirement. Other than that, it is unrealistic to think that your residence will get you anything other than free rent. I would rather be the guy with a huge rrsp but no house, than the guy with a house but no rrsp. Indeed, the huge rrsp may pay for rent through appreciation. what is appreciation in the house worth if you can't get it out somehow.

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d_oush

betamaz said: "your house is not a money tree"What if you sell your house in Vancouver and move to Thunderbay? There are always going to be places that are a lot cheaper to live than Vancouver, so you'll be able to pull more money out of a house here that you would somewhere else.

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betamax

we've got a whole different scene out here.Sure, so long as you're lucky enough to retire and sell into a boom, not a bust. If you want to bet your retirement on that, go ahead. What a house, paid for, buys you in retirement is free rent – i.e. a substantially lower cost of living while you get by for 20 – 30 years on significantly reduced income. Then you can sell the house close to the end and it'll buy a final couple of years at the Shady Acres Retirement Community. That's about it – your house is not a money tree, never was except for the odd period of irrational, amnesiac exuberance.

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ken

This is slightly offtopic, but I just thought of it because of chrisnotts post:How do you find a good financial planner? Do you just look up financial planning in the yellow pages? Do you ask at your bank? How do you find someone that you can trust that has your best interests in mind?I haven't thought much about this topic, but I'm getting to the age that I need to start thinking about it, so anyone have any tips?(and no, I'm not going to invest in Vancouver real estate to fund my retirement)

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chrisnott

My gf has a background in financial planning. As she sees it, your house (condo, whatever) is your safety cushion. If you have a car accident and can't work and need rehab, you can sell your house. But, if you are counting on using the equity in your home to fund your retirement, you have no safety cushion. Something happens and you need a lot of cash, too bad. Bottom line: your primary residence is NOT an investment.

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bullish

Those easterners just don't understand how much money you can make off of real estate here. Sure you can't retire on the price of a bungalow in Thunderbay, but we've got a whole different scene out here.

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