Say you’re 45 and you have $1 million of equity in a house in Toronto. Could you sell your house, invest the money and pay rent on a house solely using your portfolio?
I ran the numbers.
It costs about 3 grand to rent a house in Toronto. Assume a 6% return on a portfolio.
Here’s the plan:
Sell the house and invest the proceeds. Withdraw from the portfolio to pay your rent.
If you assume your rent increases close to the legally controlled rate (about 2%) the idea seems to work well. Between ages 45 and 90 you spend about $1.8 million on rent. But at the same time, your portfolio grows to $2.9 million. No depletion here…
Looks good, right? Keep reading…
The problem is this makes a big assumption: your rent increases actually stick to about 2% per year.
In reality, market rents in Toronto are actually rising about 10% per year. Many landlords – seeing market rents rising faster than the controlled rate – will find ways to kick out renters to jack up rents. As a renter, this means you’d likely 1) be forced to find a new house to rent every few years, and 2) experience sudden spikes in rent as you’re forced to align with market prices. Indeed, over the long term, the 2% assumption simply isn’t realistic.
Simply increasing the rent increase assumption to 4% per year fully drains your portfolio by age 84. This is a bit more doable, although you’re f@cked if you live past 84. Also, a 4% rent increase assumption might still be low, given it’s less than half that of market rent increases.
Obviously, the story gets worse the faster rent increases. At a 10% annual increase, you’re eating cat food in your senior years. In this scenario your portfolio runs dry by age 65 – just in time for retirement!
With a long-enough time horizon a $1 million portfolio isn’t enough to cover rent for the rest of your life.