Across the country, people close to retirement are overinvested in real estate. [In Ontario, there is also an unhealthy infatuation with small, grubby ‘Group of Seven’ prints. Haven’t these guys heard of Jack Shadbolt? Ten times the square footage, five times the colour range, at a third of the price. Not everything in BC is overpriced.] – vreaa
“Jill and Darby, both 62, are looking forward to easing into retirement. She has her own business and he has just quit his job to work as a consultant. Together, they earn a tidy sum, netting $10,000 a month. But their spending is high, too. And they are in the real estate market up to their ears. They have a cottage on Georgian Bay worth about $700,000 with two lines of credit on it, one for a down payment on a couple of rental properties and the other to lend money to their children, who are making regular payments. They have a home in Barrie, Ont., valued at $300,000 with a $135,000 mortgage, and the two rental properties that just cover their costs and in which they have virtually no equity after the cost of selling them is taken into account. They plan to sell the income properties one day and divide the anticipated profit with their son and daughter. As well, they hold $200,000 mortgages for each of their two children, who each pay them $1,200 a month. Their plan is to retire on about $80,000 a year, far less than the $100,000-plus they are spending now. The $100,000 doesn’t include the $2,000 a month credit card payment. Darby and Jill have more than $1-million in savings and investments, including the mortgage loans to their children.”
RE related assets and liabilities include:
Assets: Cottage $700,000; family home $300,000; two rental properties $380,000. Total: $1,380,000
Asset or liability?: Mortgages to children (money lent to children to buy RE) $400,000.
Liabilities: Line of credit on cottage (down payment rental properties) $90,000; Line of credit on cottage (loan to children) $75,000; mortgages on rental properties $265,000; mortgage on family home $135,000. Total: $565,000.
See the original article for full analysis, and advice to the couple from a financial planner, which includes the following:
“They have too many eggs in one basket. People need to watch their real estate diversification with regard to location. Darby and Jill have their home, their cottage and two rental properties all in the same region. Their children also live in the area, raising the couple’s exposure to a single real estate market even further because of the mortgages they hold. They have 72 per cent of their net assets in real estate in the Barrie/Georgian Bay area – almost $1.8-million. They may want to reconsider their risk profile and their ability to absorb a rise in interest rates in deciding whether holding the two rental properties matches their short- and long-term goals. “
[Translation: “Sell!” -vreaa]