Most Canadians are convinced that home ownership is better than renting; they believe that renting is just throwing money away. But that is not necessarily true, especially for seniors.

True, home ownership is a way to build up equity. However, retirees don’t necessarily need more equity. What they often need is income.

Suppose a client couple aged 65 sells a $500,000 house — whose annual costs (property taxes and utilities but excluding major repairs) are $8,000 — and rents an apartment for $1,800 a month. A 6% return on the $500,000 would generate $30,000 in gross income ($22,500 after taxes, assuming a 25% tax rate). That would cover the rent in Year 1; but, of course, rent will inevitably increase.

However, there’s still the $8,000 in maintenance that won’t be needed, so it will be a number of years before your clients will have to take money out of their capital to help pay the rent.

If your clients don’t need extra purchasing power, they can use that $8,000 for part of the rent and take the rest out of investment income. In that case, it would take 16 years — your clients would be 81 — before money would have to come out of their capital to help cover the rent, which is assumed to increase by 3% a year.

A second option is to pay $4,000 out of other income toward rent and take the rest out of investment income. In that case, it would be 10 years before money would have to come out of capital. That other $4,000 for extra spending would shrink in value with inflation, but it would still be worth around $3,000 in 2010 dollars 10 years from now, assuming 3% annual inflation.

In addition, your clients won’t have to pay for major house repairs if they rent. But maintenance costs on the owned home will rise over time. With 3% inflation, the $8,000 would rise to $10,750 in 10 years.

The downside risk is that the invested assets don’t grow at all, or gain only 0.5% a year (assuming
all the rent is taken out of investment income). Maintenance and major repairs would offset any increase in real estate values. If we assume major repairs of $2,000 a year, that’s $10,000 in total maintenance and repair costs over 10 years, which is equal to 2% of $500,000. That means house prices would have to go up by more than 2.5% for home ownership to offer a net return over renting in this case.

Another approach is to look at the opportunity cost. You take the $21,600 (12 months of $1,800 rent) in after-tax income minus the $10,000 for house costs — $11,600, which is 2.3% of $500,000 — and deduct that from the expected portfolio return, which leaves you with 3.7%. From this perspective, the client has to expect the house’s value to appreciate by at least that much.

Some financial advisors, such as Allan Cameron, branch manager with Investment Planning Counsel in Toronto, conclude that clients are usually worse off with home ownership than with renting.

On the other hand, Jack Courtney, assistant vice president of advanced financial planning with Investors Group Inc. in Winnipeg, points out that rates of real estate price increases vary across the country and from year to year. You have to consider the location involved, says Courtney. For example, it was relatively easy to find rentals in Saskatchewan for six or seven years, but now a booming economy has made that much more difficult.

Of course, home ownership isn’t just about financial returns. There are other benefits, such as having a backyard, being in a safe neighbourhood and not being dependent on a landlord. And some people just don’t like apartments.

But as people age, their lifestyles and interests change. Many people like the idea of an apartment, where there is no yardwork or snow shovelling. And they can go away on vacation without worrying about watering the lawn or pipes freezing.

Other people like the companionship offered in seniors’ residences or seniors’ communities, normally rental units.

In addition, many clients find themselves in a tight financial position when they retire. For them, additional income is a necessity, not just a luxury, and they need to look at options. These include not only downsizing to a smaller house or condominium and renting, but also reverse mortgages on their existing home or leasing in a retirement community.

@page_break@There are other issues to consider raised by condo ownership. Clients may face sharp increases in condo fees. There are restrictions on improvements they can make, such as the color they can paint the exterior and whether decks are permitted in gated communities.

And you don’t own much land when the condo is in a highrise, and land increases in value more consistently than a building.

Reverse mortgages allow your clients to stay in their existing homes while using up to 40% of the equity to increase their income — income that doesn’t affect the calculation of clawbacks for old-age security. The drawback is that at 200 basis points, reverse mortgages are more expensive than ordinary mortgages, say Glenda Baker and Sheila Munch, senior financial planning advisors with Assante Financial Management Ltd. in Oshawa, Ont. Furthermore, there’s always the chance, if your clients live a long time, that there will no longer be any equity to draw on.

Another option is a home-equity line of credit, which, Courtney says, are now offered at prime plus 1%. Interest is charged only if your clients use the LOC.

Leasing in a retirement community is an increasingly popular option. As Courtney explains, with a down payment of $30,000 for a residence that would cost $150,000 to $180,000 as a condo, your clients get guaranteed rent for life.

When your clients die or move, the sponsoring organization pays back the original down payment. This option is best for people who don’t expect to move again — except into a nursing home. IE