First, I would like to follow up on yesterday’s post on “Where is Prosper.ca”. I’ve been in contact with David Andreatta from the Globe and Mail and he wrote an article in today’s edition. You can read more about it on the Globe and Mail . I was glad to hear that a lending community will be established in Canada. Many thanks to David for mentioning my blog in the Globe!
Now, back to today’s post :
Now, back to today’s post :
This is definitely on of the major source of financial discordance between the baby boomers and the generation X (or is it Y? maybe Z? anyway, Iâ€™m 25 so you can figure it out!). Several baby boomers think that their property is their retirement plan. If itâ€™s completely paid off, they think they have enough money sitting there to live long and prosper. If they donâ€™t have other source of income other than the governmentâ€™s pension they are probably wrong.
Your main residence is not necessarily an asset . As we previously discussed on this blog, an asset must create income or positive cash flow. This definition is even more important when you retire and you depends on your assets to meet your financial needs. As most retired individuals are not renting their basement or are not operating a company within the house, their property is not an asset. Every month, they have to pay their utility bills, their taxes and cost of maintenance. With $800 a month, you might find the road to be a little longer than expected.
I just have to sell my house and Iâ€™ll make 400K, they will answer back quickly. That part is true, but do they really want to leave their house? All their memories and souvenirs are within those walls. In addition to that, they still need a place to live. The other thing is that they might not be able to find something that suits them for a lower cost. House market is pretty high right now and downsizing often means going back to that small 1960’s bungalow with several reparation to be made.
Cost of retirement home are sky rocketing and you are not getting much service for the price you pay. It will easily be $1,000 a month if you need services such as nurse inside the building. Besides that, you can always rent a nice apartment or downsizing you house. In both cases, you just increase your monthly payment. Therefore, you will need more money to live on and your profit from the sell will slowly disappear.
Your property surely worth something and the day you will sell it, you will get a big chunk of money. Iâ€™m not questioning that at all. However, it will never create income as is. Unless you sell it, you wonâ€™t benefit from the equity in your property. Reverse mortgage is another option but I will write about it another day.
There is still a way to make you property an asset and still live at the same address. By doing a Smith Manoeuvre , your new mortgage will become tax deductible and you will earn monthly income from your investment. This could be a good way to benefit from the equity lying (I prefer the expression dying) in your house.Google+