Should you buy real estate just to stay in the market?

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Q: I just sold an estate home in the Greater Toronto Area very recently and decided to rent for two years in a smaller community two hours north.

Should I buy any real estate to remain in the market at age 74?

—Dee

A: Assuming this is an inheritance, Dee, I’ll give you the same advice I give to anyone who has a significant financial event in their lives: don’t rush to do something. I find whether it’s the death of a spouse, an inheritance, a business sale, etc., people often rush – or are rushed by others – to make financial decisions. Some such situations happen suddenly, and it can be tough to make the right choices under pressure.

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Another consideration, Dee, is that just because an asset has risen a lot in price in recent years, it doesn’t mean it will continue to do so indefinitely. A real estate market may have seen a 10% year over year increase, for example, over a one-year period. But if that same rate continued for 10 more years, a $1 million home would be worth $2,593,742. Possible? Sure. Likely? No.

Real estate prices in Canada have risen about 4.7% annually over the past 30 years. And in Toronto: 4.6%. And for perspective, Canadian stocks over that period have returned 8.3% and U.S. stocks have returned 10.6% in Canadian dollars.

It sounds like you’re settling into a new community, Dee. You may or may not like it. I’d be reluctant to invest in real estate in either Toronto or the new town you’ve moved to before deciding if you’ll be putting down roots there. I think renting for two years, as you have done, is the right move. But obviously you need to do something with the cash proceeds from the estate home sale in the meantime.

If you were to temporarily invest the money in real estate, you need to consider the transaction costs. There is land transfer tax to when you buy. In Ontario, the tax is about 1.3% on a $500,000 purchase and about 1.65% on a $1,000,000 purchase. In Toronto, you pay twice as much, as there is provincial as well as municipal land transfer tax. And if you invested temporarily in real estate for the next two years, you might pay a 5% commission to sell in two years. Add in all the miscellaneous closing costs on purchase and sale and you’re looking at 7% or more of the investment disappearing to transaction costs – that’s a lot over a two-year period, Dee, and would require healthy appreciation to be worth it.

And if you did invest in real estate, while you rented elsewhere, you’d have to consider managing a tenant and maintaining the property. Maybe that would be ok for you at 74, or even two years from now when your lease comes up for renewal at age 76 but becoming a landlord in your 70s may not be the best way to spend your golden years, Dee.

Frankly, Dee, I’d be inclined to consider other investment options. If you think you might use the house proceeds to buy a home in the next two years, I wouldn’t take too much risk with the money. One-year GIC rates from some smaller institutions are getting close to 3%. And if you have more to invest than you think you might otherwise spend on a new home, despite the volatility of the stock market, stocks are a great way to protect against rising prices and inflation.

If you really want to stay in the market, so to speak, consider an allocation to real estate investment trusts (REITs) that invest in Canadian real estate. It’s not a perfect way to protect against higher real estate prices, because you probably won’t find a REIT that owns much or possibly any real estate in your new town. It’s more likely you’d get broad exposure to Canadian real estate, which may include residential, commercial, industrial or other real estate types depending on the REIT.

Personally, Dee, I’d be inclined to keep the cash you could envision spending on a new home safe and liquid in cash or near-cash investments like a GIC and invest the rest of the money in a diversified, risk-appropriate investment portfolio.

If over the next year you find you like your new neighbourhood, you could consider looking for a home that you would like to live in to buy. And whether you rent it out until you move in or move in and sublet your existing rental, that may be a much better option than temporarily investing in real estate simply to stay in the market.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.