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Today’s lesson: Investing for your children’s future

Lindsay Smith

By Lindsay Smith/Columnist

This past weekend I spent some time on a patio in lovely Westport Ontario. I have no idea how, but people seem to sense that Wendy Starr and I are real estate broker/reps. One of the questions we had from a table next to us came from a couple who had a daughter starting first grade this coming school year (whatever that might look like). They were already planning for her post-secondary education and asked if we had any thoughts. They offered the ideas they had been thinking of: investing in the stock market, TFSA’s and RESP’s. All good ideas, however, Wendy and I offered a different approach.

I shared a story I have seen repeated many times in my career of selling real estate in Oshawa: parents who had purchased a rental property and held it until their kids finished high school, using the increase in value to pay for their education.

In Ontario, most kids spend 12 years in school prior to advancing to college or university. Let’s assume parents were a little late to the party and decided to purchase a rental property when their daughter or son advanced to the second grade. That leaves 10 years for a rental property to increase in value. Here is how it would have looked over the past decade:

– Oshawa Average Home Price May 2010: $228,000

– Oshawa Average Home Price May 2020: $539,000

The difference between the price to buy and sell is $311,000, and it gets better. Having paid your mortgage for 10 years you would have paid off about $55,000. Now the gain increases to $366,000! Before we run to the bank to write a cheque for tuition though, there are some costs involved in selling to take into consideration. Common expenses to sell property include realtor fees, lawyer fees and any bank fees. The exact amounts would need a conversation over a kitchen table, however for this exercise lets round it off to a net gain of about $336,000 after about $30,000 in selling expenses. Woo Hoo again!

Well again, not so fast. The government wants their cut. In Canada, a gain on a rental property is viewed as a “Capital Gain.” What this means it that it is taxed on a lower amount than personal income tax. In a simple explanation, CRA takes the gain and applies tax to half of the gain only. In this example $168,000 of the gain is taxable. A simple explanation of what this means is that even at the top tax rate of about 50 per cent, the government takes $84,000 leaving $252,000 in net equity. Now you can jump up and down and do your happy dance!

Owning a rental property is not an investment like a stock where you invest, sit back and watch your investment, it is one that does require some effort, work and knowledge. All investments come with an element of risk. However, in my career selling homes locally for over 30 years, I have seen the values decrease twice, which would indicate a rental property is a stable investment. If the argument arises that our values have increased in a wildly unusual way, and that these increases in value are not sustainable, even if you reduce the gain by half, the return is far greater than what is necessary to pay for a post secondary education. Other arguments may arise about the difficulty of dealing with tenants and, again, in my experience if you do your due-diligence, you will find that most tenants are good people, and once they get in a good rental they want to stay and will be responsible.

A stumbling block for many investors is where to find the money to use as an investment. If you are curious, I am open to sharing how you can be creative with raising capital to use as down payments.

My advice, if you are interested in learning more, is to speak with a real estate broker who is experienced in rental properties, a lawyer and an accountant. This trio of experienced professionals can help guide you through the process.

If you need clarification on any of the options discussed, or if your situation has changed and you see a real estate emergency on the horizon, I can be reached at lindsay@buyselllove.ca

Lindsay Smith

Keller Williams Energy Brokerage

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