A couple of our Successful Investor Wealth Management clients asked us about a Canadian real estate investing subject that can be sensitive for investors who are at or nearing retirement — when to sell the family home.

The clients, a married couple, are both 59 and plan to begin collecting Canada Pension next year, at age 60. They recently sold their business and have a $450,000 investment portfolio.

Their $700,000 home is mortgage-free and sits on 118 feet of lakefront in a vacation area north of Toronto. It’s a bigger home than they need, since their children are grown. They’ve thought about selling, though they’d prefer to stay put for a few years. Meanwhile, they hope their home will continue to appreciate. But they recognize that the boom in Canadian real estate investing won’t last forever, and that many baby boomers are also holding off on selling a larger-than-needed family home.

Downsizing would free up considerable cash for investment

They could sell this home and buy a perfectly adequate but non-lakefront home nearby for around $400,000. That would give them an extra $300,000 to invest, which would generate income that would allow for a higher standard of living and a bigger travel budget. But selling now would also stop them from enjoying their lakefront dream home, just when they are retired and have time to appreciate it.

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This is really a budgetary dilemma, but the best way to handle it is with a little research, a calculator and some educated guesswork.

Canadian real estate investing: Get a firm grasp of the numbers before downsizing

First, the couple should visit some homes on the market that are likely to sell for around $400,000, and find out the actual price after the sale goes through. They should do the same with homes like theirs, to get a better handle on its value. That would give them a better idea of how much money they can raise by downsizing, and the features they would forgo by doing so.

To be conservative, they might assume a total after-tax return of 6% on funds that the home switch adds to their portfolio. That return would be a multi-year average, and would come from a combination of dividends, interest and capital gains. Adding $300,000 to their portfolio would give them an extra $18,000 a year. In addition, they’d save money on taxes, utilities and other costs of a smaller home.

They should also look at what the move would do to their future net worth under various sets of assumptions. After a rise in real-estate prices like the one of the past few years, the average yearly appreciation on their home could fall short of the total after-tax returns on their investment portfolio. On the other hand, any gain they make on the home is tax-free.

They also need to take a hard-headed look at just how attached they are to their current home, and what in particular they like about it. Rather than assuming the only alternative is a $400,000 home in the same area, they might also look at, say, lakefront homes 50 miles north.

Selling the family home is an emotional as well as financial decision

There is no easy answer as to when to sell the family home, or any real estate. You should always take your time and never act on impulse. You need to consider all costs, benefits and alternatives, which are emotional as well as financial.

The long-term financial outcome can vary widely. Price changes are unpredictable, but real-estate commissions and other costs make this an expensive decision. It can get a lot more expensive if you try to back out after agreeing to buy or sell, or if you regret your choice and move again a few years later.

If you’d like me to personally apply my time-tested approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.