When Should Reid and Nikki Sell Rental Properties to Maximize Savings?
Reid, 59, and Nikki, 62, are navigating their retirement in Canada after spending 27 years teaching abroad. Since returning in 2023, they rely on their investment portfolio and rental income for sustenance. While abroad, they managed to rent out three houses in an Ontario college town. All three properties combined yield a yearly net rental income of $24,475 after taxes.
The couple does not wish to sell their properties, as they prefer to live in another city, currently renting a home for $3,400 monthly. With two of their properties fully paid off, they owe $76,000 on the third. To manage their daily expenses, they utilize rental income and a line of credit strategy. They typically maintain a balance of around $20,000 on their credit line, as their investments are performing well and provide returns surpassing their interest payments.
When Should Reid and Nikki Sell Rental Properties to Maximize Savings?
Reid and Nikki are contemplating selling their rental properties to expand their savings. They seek guidance on when to initiate this process and under what strategy. Financial expert Steve Bridge from Money Coaches Canada evaluated their situation. He highlighted their impressive net worth of $2.6 million, but pointed out that a large portion—approximately 75%—is locked in real estate. This illiquidity limits their spending flexibility.
Expert Recommendations
- The couple could sell one property each year to spread capital gains over several tax years.
- Alternatively, they may consider drawing down non-registered investments first to preserve rental income longer.
- As the properties are jointly owned, they can split rental income and capital gains, which benefits their tax situation during sales.
Bridge noted that with no children to inherit the estate, retaining properties mainly enhances their estate value while potentially limiting their current financial freedom. He advises reevaluating their investment portfolio for a balanced structure, proposing a cash or near-cash allocation of 10-15%, 40% in fixed income, and 45-50% in stocks or stock funds. This strategy aims for a sustainable average return of around 5%.
The Financial Landscape
Projected expenditure ranges between $99,000 to $114,000 annually based on Bridge’s analysis. He emphasized that if properties are sold, their spending power would increase, although current rental income slightly mitigates this gap. The couple is expected to receive minimal Canada Pension Plan benefits and about 60% of Old Age Security, suggesting that delaying these benefits until age 70 could augment their lifetime income.
Cash Management Strategy
Reid and Nikki’s current cash management involves using credit cards funded by their line of credit and investments. This method poses risks during market downturns. Bridge recommends maintaining their line of credit at zero and funding expenses directly from rental income or cash reserves. This approach ensures a risk-free return that matches the line of credit interest rate.
Health and Lifestyle Considerations
The couple’s current annual healthcare budget of $840 may need reevaluation, especially considering potential costs not covered by insurance. It’s advisable to explore third-party extended health insurance to manage unexpected health expenses.
Conclusion
Overall, Reid and Nikki are in a solid financial position. With a clear strategy focusing on liquidity, disciplined asset allocation, and annual maximizing of Tax-Free Savings Accounts (TFSAs), they are poised for a sustainable and flexible retirement. The decision on when to sell rental properties should align with their financial goals and lifestyle preferences.
