Downsizing a home can open the door to investment opportunities

Whether it’s an overabundance of space or a waning desire to do the upkeep on a large property, there are many reasons why people decide to downsize their homes.

Moving from a family home into a smaller property such as a bungalow, condo or apartment is first and foremost a significant lifestyle change. But with the right guidance, downsizing can also create several investment opportunities.

Downsizing reduces many costs including taxes, maintenance, heat and electricity. “So right away people can save money,” said John Deakin, real-estate broker at Deakin Realty. “And freeing up capital or eliminating your mortgage altogether is hugely desirable. It’s surprising how many people are still paying mortgages into their 70s and beyond; it’s often a short-sighted mistake.”

When a homeowner frees capital attached to a principal residence, there are several opportunities for investment.

“Every case is different, of course, but generally the best situation for everyone is to have no mortgage on the roof over their heads as soon as possible,” Deakin said. “This provides security but also frees your home to become an investment vehicle as you can put a secured line of credit against the home and use that money for investment, thereby making those funds taxdeductible.”

When it comes to investing that capital, people have a wide range of options. Owning a residential revenue property is one of them, although Deakin cautioned it’s not an avenue best suited to everyone.

“There are a lot of people who shouldn’t own revenue-generating real estate because they can’t handle the unpredictability of it – and the amount of time and attention it can require,” he said.

“If your plan is to buy a rental building, you should be someone who already knows about buildings and can be active in maintaining one. It becomes a hobby that generates nice returns.”

Being inexperienced in this field can also lead to poor choices regarding the tenants you accept.

“It often happens that people rent to tenants they really shouldn’t,” Deakin said. “They feel empathy towards someone in a rough spot who just needs some help because their credit isn’t great, and so on. These situations often don’t end well for owners.”

Aside from owning a rental building, there are other somewhat less daunting options for investing in real estate after downsizing your home.

One alternative is to find a smaller property or rental to live in, and rent out your family home.

“This is a great option for empty nesters,” Deakin said. “Doing this eliminates closing costs and it’s a much easier transition into owning a rental.”

Knowing the property inside out is a big advantage when it comes to renting it.

“It’s not like buying a building blind and six months in you realize the basement is leaking. Having lived there, your familiarity with the home is a big plus.”

It can be very rewarding financially over the long term as well which, of course, is the ultimate goal.

“Let’s say you have a four-bedroom, three-bathroom home, with a two-car garage and 2,600 square feet, for example,” Deakin said. “You can end up getting a nice monthly rent for it – say $3,000, depending on other factors such as condition and location.”

When switching your principal residence into an income property, it’s important to establish its value. That’s because the difference between your purchase price and the value of the property when you switch it over is tax-free when it comes time to sell it.

“The first year or two after you convert it into a rental, the income isn’t hugely significant,” Deakin said. “But three or four years later, the income grows as your mortgage balance goes down – and interest on that mortgage is 100-per-cent tax-deductible because it’s considered an investment.”

Another income-generating option to consider when downsizing would be to purchase a duplex or triplex and live on the lower floor, while renting out the other levels.

“Living in a one-level space is a smart decision because the people looking to downsize are usually of a certain age,” Deakin said. “So moving to a smaller space that has no stairs, or a limited amount of them, will allow people to live there for longer than would typically be the case in a multi-floor property.”

If none of these options are suitable for your situation, it’s also possible to sell your large home, move to a smaller property and use the remaining capital to purchase a second property as an investment.

“In this instance, the same principle applies regarding your mortgage,” Deakin said. “You always want to have no mortgage on your primary residence. Instead, your mortgage should be on the investment property.”

The only reason you would put any kind of a mortgage on your primary residence would be to offset the purchase price of the investment property, which can be done through a secured line of credit, he said.

While these are all valid and realistic investment options when downsizing, Deakin emphasized that there are many other avenues to consider outside of real estate as well.

“I help a lot of people who are in this situation and many of them just aren’t in the head space to be owning real estate,” Deakin said, “and that’s fine. There are several investment options to explore outside of property. It’s all about finding something that is realistic and provides security for you and your family.”

© Copyright (c) The Montreal Gazette

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