Now is the time to think about downsizing or rightsizing your home if you're ready. The waiting game is risky if you're hoping to cash in on decades of price appreciation. Consider selling now, while the real estate market is defying the many predictions of a slow down. With housing prices still on the boil in many cities, now's an ideal time to consider the question of downsizing. Many baby boomers are in love with their homes and want to remain in them as long as possible for lifestyle reasons. But houses are a financial proposition, too. Some people will need equity locked in their homes to pay expenses in retirement. Home equity lines of credit and reverse mortgages are one way to access this equity. But so is selling and moving to something smaller and less expensive. The advantage of selling now is that you may have an opportunity to lock in a price that reflects decades of strong appreciation. If you wait, who knows? There's a saying that the cure for high prices is high prices. In the housing market, it means that rising home values are making ownership increasingly unaffordable. If demand for homes falls as a result, home prices will drop as well. The decline could be exacerbated if baby boomers jump into the market to sell houses they're hoping to use as part of their retirement.
There are many resources that can help you project what your house might be worth any number of years in the future, and you can use any rate of average annual price appreciation you like. If you're not sure how much your house might rise in value on average per year, try using the 30-year average inflation rate of 2.5%. Using these resources can show you what could happen if you wait to sell and prices fall. It's important to run the numbers on downsizing in a situation where your house won't generate the price you've been expecting.
Whatever price you decide to use for your home, make sure you consider the various costs of downsizing. These costs include real estate commissions, legal fees, land-transfer tax (where applicable) and hiring a mover. There are also other costs to consider such as, the costs of making upgrades in your next home or acquiring new furnishings like window coverings or smaller couches and chairs for a condo. You'll have to add the cost of a condo or a smaller home to your plan to buy. It's not uncommon for two-bedroom condos in desirable locations to costs almost as much as the family home baby boomers are selling. The price gap could shrink even further if condo demands are stoked over the long term by waves of boomers moving out of their family homes.
However, much of what you're left with is a net gain after downsizing into the right home, there are two ways to use money. One is to create a savings account that you can dip into periodically for big purchases, and another is to invest the money and generate income to help cover month-to-month living expenses. If you're thinking of investing for income, resources can show you how much to expect on an annual pre-tax basis. It's important to be able to project how much income you can get without touching your principal. After fees, 2–3% is realistic for a diversified moderate risk portfolio. It's understandable if you decide to pass on the opportunity to sell the family home in a hot market that cannot keep rising indefinitely. Lifestyle matters as much as money. With using the right resources, you'll be able to say you’re made your decision to stay after looking at all the angles.
Source: The Globe & Mail
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