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Sudden Wealth: Real Estate Thumbnail

Sudden Wealth: Real Estate

Insights Sudden Wealth

Whether you're downsizing, moving to a rental, selling the cottage, or divesting an investment property, you'll have money in motion.


I find it a bit ironic to speak of real estate as a source of sudden wealth. Typically real estate builds wealth slowly and steadily over a long time, however if you decide to sell that real estate to access the capital you may be surprised by the sudden inflow of cash.  
Building wealth through real estate has worked out well for many, often by accident, but converting that wealth into spendable cash can be tricky.
In Ontario there are burgeoning retirement communities in Brighton, Coburg, Grimsby, Niagara Falls and others, all within a short drive of Toronto. The desire to get away from the traffic, pollution, crowded streets and high prices is driving retired people who are no longer held in place by their job to more rural living opportunities. This tends to free up a lot of cash, even if you've never seen yourself as a real estate investor. Even someone of modest wealth who has decided to downsize their million-dollar Toronto home may suddenly be responsible for $500,000 in investments, with little or no experience in managing that kind of money. This form of sudden wealth catches a lot of people off guard. The wealth didn't acrue suddenly, but the conversion to cash did.  The decision to downsize was not one that cropped up unexpectedly, but often the management of such money is forgotten until the property has sold in the cash is in the bank account.

Many people who are real estate wealthy never intended to get that way, it was a happy accident. Our real estate markets in Ontario have been very frothy for a very long time, so people who were lucky enough to buy a house a long time ago have seen significant appreciation in the value of those properties. Now that we have started to see some cracks in the real estate market, especially in Toronto, there seems to be an even greater desire to downsize and de-risk.Although this happy accident is a lot better than the alternative, you still may find yourself in a situation where you have limited experience with managing significant sums of money, and now have no choice. Even more concerning, if you're the type of person who lived a relatively modest lifestyle, this money being freed up by the sale of property may be everything you have, making it all the more necessary that it lasts.

Go forward, but with caution

I was recently working with a client who had just downsized their property and had about $400,000 to invest.They had a relatively modest savings before this, but now that they were coming into a larger chunk of cash, they were concerned about how to invest it. Their position was clear, “I don't want to lose this money.”  I made two points to them. Firstly, just because they have come into new money does not mean they need to change who they are as investors. They weren't exactly gamblers to begin with, so there was no reason to take on unnecessary or additional risk simply because they now have some capital. Secondly, I reminded them that they had always had this money. The equity in their home was an investment like any other, and just because they didn't see the value of a change day-to-day doesn't mean that it didn't. They had been able to leave this money alone and let it grow when it was part of their equity in their property, and so there should be no real reason why that should change now that they've downsized. In fact, since this was all the money they were likely to have for the rest of their lives, it was important to them but they have some guarantees about performance. We ended up using an investment that would guarantee an income for life, and this is very common for people who are using the equity in their home to provide for their overtime.

Go forward, but with caution

I find the biggest struggle for people who are converting real estate wealth into financial assets is the struggle with volatility. Real estate is a volatile asset but it's hard to witness that volatility on a day-to-day basis. However, once you've invested the money in capital markets is very easy to check your statement or your online portfolio access to see exactly what your account has done on a day-to-day, weekly, or monthly basis. This is likely far too frequent review, and can add additional stress and investing complexity for people who are not used to it.

Price declines are not in themselves a bad thing, but the temptation to do something in response to them can be tempting and dangerous. There are many times when doing nothing is the correct response to volatile times in the market, however we as human beings have a really hard time with doing nothing in stressful times. This is where having a financial coach or guide can be particularly handy. Money should be a rational thing, at the end of the day it's just math. However, money provides a sense of security and control, both things that have very little to do with rational thinking. So, it's important to involve somebody in your finances that doesn't have the same direct attachment to the outcomes of your decisions. A professional financial planner can help you separate good decision-making from your natural tendencies towards fear or greed. They say "perspective is everything," and this is one situation where that rings true.