Hobby farm may be in this couple’s retirement future, if they can sort out their real estate holdings

Their biggest investment is two condos, which are not stellar investments

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A couple we’ll call Max, 52, and Tess, 53, live in Quebec with their 14-year-old son Louis. Max and Tess work in the high-tech industry. They bring home $8,200 per month after tax, add $300 net rents from two investment condos and $1,500 from Tess’s mother who lives with them for total monthly disposable income of $10,000. The investment condos have estimated prices of $270,000 and $400,000. Max and Tess own three acres of farmland in Ontario worth $50,000.

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Family Finance asked Derek Moran, head of Smarter Financial Planning Ltd. in Kelowna, B.C., to work with Max and Tess. He sees a family with solid finances including reasonable debts of $420,000 for condo investments with tax-deductible interest.

Family plans  

Their plan for retirement is to farm their land. They consider selling their Quebec house and buying one near their Ontario farm. Moving to B.C. and farming a little is another option they are considering. Their farm would probably not make enough money to cover costs. They might also have to borrow for equipment if they do not sell the Quebec properties. The Canada Revenue Agency takes the view that a farm must have a serious prospect of profit if costs are to be deductible. Farming is for now only a concept, not a plan, so we will not evaluate it.


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Max and Tess moved to Canada from Europe 21 years ago. By age 65, they will have 34 and 33 years of residence in Canada, respectively, out of the 40 years required between ages 18 and 65 for full OAS benefits.

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Louis has $45,000 in his Registered Education Savings Plan. His parents add $200 per month. Federal and Quebec programs add $60. Assuming growth at three per cent per year after inflation for three more years to his age 17, the RESP would have a value of $59,000 and would support four years of post-secondary education.


Their investment income will be an important part of total retirement income, compensating for the farm that may generate no profits. Their largest investment by category is their allocation to condos. On a current-income basis, the units are not stellar investments. Condo 1 has an estimated street price of $270,000, a $190,000 mortgage the interest on which is $6,758 per year on top of which they pay $4,740 for taxes, insurance and condo fees. Their annual net income after costs are deducted from $13,200 rent is $1,702 per year, which is a 2.1 per cent return on their $80,000 equity.

Condo 2 has an estimated street price of $400,000, a $230,000 mortgage, generates $16,800 annual rent, and leaves them with $2,352 each year after $8,208 debt service costs and $6,240 for taxes, insurance and condo fees. Its return on equity works out to about 1.4 per cent, which is what they could get with no risk or fuss from a GIC.


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Max and Tess could sell one unit and put proceeds into a Canadian equity exchange traded fund with hefty weights on banks, pipelines and railroads with an estimated return of five per cent to seven per cent per year before inflation and with no leverage at all. That would provide diversification and liquidity. If they keep the condos and continue to finance them for the two decades to the time their mortgages are paid off, they can accrue modest income and perhaps capital gains. We will assume that they keep the condos but continue to add to their RRSPs for retirement income and current tax savings.

Retirement income

When they retire, Max and Tess will have their own savings including income from their condos, OAS and QPP to support them. Their QPP pension should be $589 per month for Max and $447 for Tess. Their OAS benefits at age 65 based on 34-years residence for Max and 33 years for Tess will be $6,258 and $6,074, respectively, using 2020 rates.

Net rent from their condos adds up to $4,054 per year. When their mortgages are paid off in two decades, the units will generate gross rents of $30,000 per year and net rents after mortgage and other costs of about $20,000 per year. Were they to sell both condos, they could use their RRSPs to absorb gains and defer taxes. Price appreciation, though hard to estimate, will add to their wealth.

The couple’s RRSPs have a current balance of $285,000. They add $30,000 per year. If they continue this rate of saving and grow the account’s value at three per cent after inflation for the 13 years to Max’s age 65, they will have a value of $887,065. That sum, still growing at three per cent per year after inflation, would produce an income of $50,942 per year for 25 years to their ages 90/91 at which time all capital and income would be paid out.


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If Max and Tess work to the time when each is 65, they will have retirement incomes totaling $77,668 composed as follows: QPP for Max $7,404, QPP for Tess, $2,940, OAS $6,258 for Max, $6,074 for Tess, RRSP income of $50,942 per year and net rents of $4,050 per year. After 15 per cent average tax in Quebec or 12 per cent average tax in Ontario, they would have $5,500 per month to spend in Quebec or $5,700 per month in Ontario.

Eight years later, with mortgages paid in full, net rents will rise to $20,000 per year and their income to $93,618. After 15 per cent average tax in Ontario or 20 per cent in Quebec, they would have $6,630 to spend per month in Ontario or $6,240 in Quebec. With no debt-service costs nor savings, allocations would fall to about $5,000 per month. They would have surplus cash flow and a diversified portfolio of financial assets and real estate.

“Max and Tess have a solid retirement income,” Moran concludes. “A small farm as they envision would not add to it.”

Financial Post

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5 Retirement Stars ***** out of 5


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