So, you may have read that Conrad Black just sold his Bridal Path Mansion (which kind of looks like the McAllister’s house from Home Alone). But, you may not know that he is renting it from the person that bought it from him. He’s literally renting out his own house.
I’m not taking a stance on Conrad Black. But, I do love a new take on personal finances and I think there’s something here for people who want to downsize but keep their home and avoid a reverse mortgage or for investors who want good tenants. It could be a really good idea.
Toronto Metro news calls this “pulling a Conrad – A verb, meaning to sell one’s home and rent it back.” It’s a great article and you should read it. Click here
Here’s what I like:
From Conrad’s (or the home owner) POV
1. When nearing retirement, one must think about expenses and budgets. Owning a home is hard on a budget since sh*t happens; the roof may leak, foundations can crumble, bricks need repairing. Owning a home is hard on any budget, but especially that of a retiree or someone on a fixed income. Renting absolves you of that anxiety. You don’t pay property tax, home insurance, or repair and maintenance. If Conrad’s furnace breaks, he can just calls up his new landlord: “hey there, can you come fix my furnace?” This is a major difference between a “Conrad Black” vs a reverse mortgage.
2. He’s capitalizing on a (likely) tax free investment. I’m assuming his Bridal Path home was his primary residence and that he qualifies for the primary residence tax exemption. I’m also assuming he was probably mortgage free. So, he sells his home for a cool 20 million (based on recent valuation of homes in the neighborhood – also check this out), banks it and capitalizes on the hot Toronto real estate market. Many retirees are sitting on homes that have majorly appreciated over the decades. The Toronto real estate market is on fire. Many retirees could use this tax-free money in their portfolios to boost their income and pad the pockets. Now, you may not be sitting on a 20 million home, but the idea of capitalizing on your gains deserves some consideration. Selling your primary residence gives you the entire amount of the equity in your home (less fees to sell of course) whereas a reverse mortgage only unlocks a portion of the equity in your home.
3. He gets to live in his house!! Most of the time, clients don’t want to downsize in retirement (even though it can make so much financial sense) because they are emotionally attached to their home. I get it. They’ve raised their kids there, ya know? They want to have their grand kids over. Keeping the family home is often an emotional decision, not a financial one. But, if you sell it, capitalize on the gain and then rent it yourself, you get to STAY IN YOUR HOME. The grand kids can still come over. This is a win-win situation. The downside is that you could get the boot from your landlord. But, if the landlord has purchased the home strictly for investment purposes, they likely don’t want to live there anyways and you should be good to grow old and gray there.
From Landlord’s POV
1. Best. Tenant. Ever. The biggest worry for an investor (looking for a rental income property) is finding a good tenant. Ummm, this person has loved and lived in your investment property for decades. They are used to it’s creaks and squeaks and probably love it all the more. You have the best tenant who is DEFINITELY going to love and care for your property. Best case Ontario.
The “Back-Of-The-Envelope” Math
I’m not sure what he’s paying in rent, but let’s estimate! If the average detached home in Toronto sells for 1M and we assume that Conrad’s home sold for $20M, it makes sense that there may be a 20:1 ratio between Bridal Path Mansion:Detached Toronto Home. If the average 3 brd home rents out for $3000 (estimated from padmapper), then we can assume that rent for the Bridal Path Mansion could be $60,000 a month, or $720,000 a year. That seems steep, I know. However, an annual rate of return of 3.6% on $20,000,000 could cover it quite nicely without even touching the principle. Now, if we take inflation at appx 2% into account, an average annual rate of return of 5.6% could do it! I think it’s definitely possible for someone to reach 5.6% annual rate of return, even in a balanced portfolio. Yes, I realize that I’m not calculating the potential growth for the property over time. But, in our scenario the investment portfolio is large enough to sustain the carrying cost of your home (rent) in retirement. How much do you think you could earn from the value of your home if it was invested? Could it support your rent? Very very cool to think about. No more repair and maintenance! You would obviously need to run some serious cash flow projections on this, but take a moment and think about it as an option.
I don’t know what Conrad’s motivation was, and it doesn’t matter. This isn’t about Conrad Black. This is about a cool idea. Is this an alternative to reverse mortgages? The idea that you can sell your home, fully capitalize on the gains, reduce your overhead and live in the house you love is clever. The idea is something that shouldn’t be overlooked.