Before you sell the family home: three downsizing options worth doing the sums on

There comes a point for a lot of people when the family home starts to feel like more house than they really need. There may be bedrooms that are rarely used, a garden that takes more work than it once did, and rising rates, insurance and maintenance costs to keep on top of.

For many years, the obvious next step has been to sell the family home and move into a retirement village. For plenty of people, that is absolutely the right decision. Retirement villages can offer security, companionship, activities and freedom from maintaining a large property.

But I also think people need to understand exactly what they are paying for, what they may be giving up, and what other options are available before they sell a home they may have spent 30 or 40 years working to own.

I’m not interested in telling people what they should do. What matters to me is making sure families know the facts before making what can be one of the biggest financial and lifestyle decisions of their lives.

Because downsizing is not just about moving into a smaller house. It is also about deciding where you want your money to sit, who you want around you, how independent you want to remain, and what you want everyday life to look like.

Understand what a retirement village involves

One thing I often hear is people talking about “buying” a retirement-village unit in much the same way they would talk about buying another house. In many cases, that is not quite what is happening.

Most retirement-village residents enter under an Occupation Right Agreement, or ORA. They usually pay a substantial lump sum for the right to live in a unit, but often do not own the property itself. Deferred management fees can also be significant, and in some cases may be around 30 percent.

Using a $700,000 entry payment as an example, a 30 percent deferred management fee would equal $210,000. That could leave around $490,000 being returned to the resident or their estate, before any other agreed deductions. Depending on the agreement, the resident may also not receive the capital gain if the unit increases in value.

None of that means a retirement village is a bad choice. It simply means it is a different financial proposition from owning your own home, and that difference needs to be properly understood.

Before signing anything, ask what you are paying, what you actually own, what happens to any capital gain, what fees are deducted when you leave, and how and when your money is repaid. These are basic questions, but they can make a very significant difference to the long-term financial outcome.

It is also worth remembering that a retirement village and a rest home are not the same thing. A rest home provides residential aged care for someone who has been assessed as needing that level of support, while a retirement village is primarily a housing and lifestyle choice.

Option one: Build smaller and stay on your own property

Another option is to stay on the property you already own, build a smaller second dwelling, move into it and rent out the main house.

For the examples in this article, I’m using around $500,000 for a completed minor-dwelling project. That is only an illustrative figure, because actual costs depend on the home, the section, earthworks, drainage, service connections, access, landscaping and other site-specific work.

This is why I always encourage people to look beyond the headline house price. A lower starting price does not necessarily mean a lower completed project cost. You need to understand what is included, what site work may be required, how services will be connected, what council fees apply, and what additional costs could arise.

It is also important to use an experienced, reputable builder, check references, read the contract carefully and understand what guarantees and protections are in place. I would much rather have an upfront conversation about a possible extra cost than have someone discover it halfway through a build.

If the main house could be rented for $600 a week, that would produce gross rent of $31,200 a year. Allowing an illustrative 20 percent for operating costs would leave around $24,960 a year before tax. Over ten years, before allowing for rent increases, that would total almost $250,000.

But the rental income is only part of the story. You still own the land, the original house and the new dwelling. The $500,000 has not simply disappeared; it has been used to change what your property can do.

You can live in the smaller home, generate income from the main house, use it for family later, and eventually sell a property with two dwellings rather than one. That does not mean a $500,000 build automatically adds $500,000 to the property value, because value will depend on the site, design, quality, privacy, parking, access and future buyer demand.

There is, however, an important difference between paying a fee and putting money into an asset your family continues to own.

Option two: Bring the next generation home

Another possibility is for Mum and Dad to move into the new smaller dwelling while adult children and grandchildren move into the original family home. They might pay market rent, discounted family rent, or contribute towards household and property costs in another way.

At $450 a week, for example, gross annual rent would be $23,400. But for many families, the financial return is only one part of the benefit.

One of the things older people sometimes worry about is becoming a burden on their children. A granny flat can create a very different situation because living close to family does not have to mean giving up independence.

You are not moving into your daughter’s spare bedroom or living in your son’s house. You still have your own kitchen, lounge, garden, routine and front door. Your family is simply nearby.

That can make everyday life easier in ways that are hard to put a dollar figure on. It might mean seeing the grandchildren without having to organise a visit, or having someone close by if you need help with a heavy job, an appointment or something around the house.

Support does not only flow one way either. Grandparents often contribute enormously to family life. They may pick children up from school, look after the dog, cook a meal, keep an eye on the house or simply be there when life gets busy.

Quite often, adult children actively want their parents closer. Thirty metres away can feel very different from 30 kilometres away, particularly when each household still has its own space and routine.

Good design is important if this arrangement is going to work well. Entrances, windows, parking, fencing, planting and outdoor areas should all be considered so both households have privacy. If money is changing hands, the financial arrangements should also be clear from the beginning.

Option three: Sell your home and build on your children’s property

A third option is to sell the family home and build a smaller dwelling on a son or daughter’s property.

Using a home sale of $723,000 as an example, and allowing $500,000 for the minor-dwelling project, that would leave approximately $223,000 before real-estate commission, legal costs, moving expenses and any additional building costs.

If the remaining $223,000 were invested, illustrative annual returns might be $6,690 at 3 percent, $8,920 at 4 percent, or $11,150 at 5 percent. Those figures are before tax and actual investment returns will vary.

For some people, however, the biggest attraction is not the money left over. It is the chance to move from an older, high-maintenance house into a new, warm, easy-care home while still being close to children and grandchildren.

There is one major issue that should never be overlooked with this option. If Mum and Dad spend $500,000 building on their child’s land, they may not own the land underneath their new home.

That is why proper legal advice is essential. Families need to be clear about whether the money is being treated as a gift, loan or investment, what right the parents have to remain living there, what happens if the property is sold, what relationship-property issues might arise, and what happens when the parents die.

This should never be left to a handshake or a family understanding that everyone will simply work it out later. Good legal agreements help protect good family relationships.

Look at the money, but also look at the life

There is no single right answer.

A retirement village may offer security, community, activities, lower maintenance and access to support. A minor dwelling offers something different. It can provide independence without isolation, allow generations to support each other without living in the same house, create rental income, and potentially add another long-term asset to the family property.

When you are comparing your options, I think there are four useful financial questions to ask: what will we spend, what will we still own, what income could it produce, and what asset will be left at the end?

Then there is one more question that matters just as much: what will everyday life actually look like?

Do you want grandchildren dropping in? Do you want family nearby if you need a hand? Do you still want your own front door and your own space? Or would you prefer the community and lower maintenance that retirement-village living can offer?

There is no right answer for everybody. You have worked hard for your home and your savings, and before you make a decision about what happens next, you deserve to understand all your choices.

Downsizing should not just be about finding a smaller house. It should be about creating a good next stage of life.

NOTE: The financial examples in this article are illustrative only. Building costs, property values, rent, tax, investment returns and individual circumstances vary. Anyone considering a retirement village, residential care, property development or an intergenerational property arrangement should obtain independent legal, financial and tax advice.