Q&A: Sell condo now?
Question: I am 53 and have an income of around $29,000 annually. I plan to retire at age 60. I bought a two-bedroom condo at $190,000 and can sell it at $300,000 now. If I sell, I will have around $152,000 cash on hand (I have a $138,000 mortgage).
Should I buy another one bedroom condo right away at a fairly high price or should I rent for two years and wait until the price of real estate slows down? If I do decide to rent, what should I do with the cash on hand? I would like to have a return of at least 6 per cent on this amount. However, the tax consequence is a big worry for me. Looking forward to hearing from you. – J.
Gordon Pape’s answer: You are asking me to predict the movements of the real estate market over the next two years. I don’t know of anyone who can consistently do that accurately. Moreover, real estate prices are very much driven by local factors and you don’t say where you live. For example, a condo in a boom town like Fort McMurray is unlikely to drop in value unless development of the Alberta Oil Sands is dramatically curtailed. But in a city like Vancouver, where prices have gone through the roof, a corection at some point is likely. Of course, no one knows when.
I can tell you that, historically, we have seen periods of weakness in residential housing and especially in the condo market after excessive price run-ups. I can also tell you that the housing market in the U.S. softening. But if inflation moderates and the Bank of Canada starts to lower interest rates again, that could provide new impetus to housing. You can see why predictions are so uncertain.
So there is a danger in dropping out of the housing market for two years. You might find that prices have moved even higher when you buy back in. Only you can decide whether you want to take on that risk.
If you do, where should you invest the cash? Since the money is not in a registered plan, you want to maximize your after-tax return. That means avoiding interest-bearing securities like bonds and GICs, the income from which is taxed at your marginal rate. Instead, consider high-quality preferred shares which benefit from the enhanced dividend tax credit. The dividend rate will likely be less than your 6 per cent target but your after-tax return will more than compensate for that. In fact, lower-income taxpayers may pay hardly any tax at all on dividends, depending on where you live. For example, an Alberta resident with $30,000 in taxable income pays tax at a rate of 0.10 per cent on dividend income. Residents of British Columbia, Ontario, Manitoba, PEI, Saskatchewan, and the Territories pay nothing.
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