Safe as houses, right?
Property investment is a legitimate means of accruing wealth for retirement.
But whether or not it is the right path to a comfortable retirement for you is another question entirely.
If you’ve started to think about retirement, your head is probably buzzing with the dizzying number of options available to maintain your standard of living after you’ve stopped working.
You want to choose the right option and make smart choices early on to reap the benefits later, right?
Should you be scraping every cent you can into superannuation?
Do you have enough money in the stock market?
What about cash? How much of that do you need to keep aside?
Then there’s property – is there a certain number of property investments you’d need to make it work?
We will delve into the ins and outs of property investment for retirement below, but first, it pays to give you a brief reminder to speak to a financial planner before you make a bid at that auction.
Property investment basics
Property is a physical asset you can touch, feel and even move into if you need to, so it makes sense that a ‘bricks and mortar’ investment feels ‘safe as houses’.
Property can provide income in the form of rent and this fact alone makes it feel like an excellent option for those looking to reduce their working hours or ease into retirement.
But there are risks and tax obligations associated with any investment choice, and when it comes to using property investment to boost retirement savings there are several pros and cons to consider.
Pros of property investment for retirement
- Living off rental income
An attractive prospect for many retirees is having enough rental properties in their asset pool to fund their lifestyle post-work, but this doesn’t always pan out so neatly.
To start, you’d likely need multiple properties in your portfolio to generate enough income to support your lifestyle.
Properties can be expensive to maintain too, not to mention time-consuming to pay off, so rental gains can be ambiguous.
Working with a financial adviser and taking into account how mortgage repayments and other additional expenses weigh into this equation are necessities for property investment.
- Capital appreciation
Equity – the golden egg of property investment.
If you have owned property for a while, there is a good chance it has grown in value and is now worth much more than you paid for it.
Equity growth also often equates to higher rental returns but relies on your ability to have made smart property investments in the first instance, which again, is something your financial planner can assist you with.
- Tax incentives
Depreciation and negative gearing can help to offset some of the costs associated with property investment, but remember, negative gearing means the costs of owning a rental property exceed the returns you earn.
- Low outgoings
Do you have handy skills to conduct maintenance on properties?
Perhaps a trade background even?
Maybe you can use your own skills to save on property improvement costs from the outset?
Leveraging your existing skills may assist to increase the capital growth of your property and manage ongoing costs affordably.
- Personal benefits
Are the properties you own in holiday locations?
Many property investors enjoy the benefits of having an instant holiday home available to them while still reaping the benefits of short-term rental income and equity growth.
Cons of property investment for retirement
- Income is not guaranteed
The rental market can change, and rental income is never guaranteed.
Would you be able to afford to manage your property asset’s ongoing costs if your rental income stream was interrupted?
- Equity loss
Not every property will appreciate in value in the way you hoped.
Recently, the property market has experienced a huge upsurge in value growth, but this pattern is unlikely to be sustained for much longer.
Like stock investing, the ‘buy on a low, sell on a high’ mentality applies for investing in property too.
- Interest rates and mortgages
Quite simply, higher interest rates mean higher mortgage repayments and increased costs for property investors.
- Investment management
From malicious damage to tenants overstaying their lease or defaulting on rent – property investment is not a ‘set and forget’ investment option.
- Restricted liquidity
If you need access to the equity you have in your property portfolio, the path to releasing these funds in an emergency situation is time-consuming and costly.
- Costs can pile up
It pays to remember that broken dishwashers or air conditioners and faulty wiring are all problems for the landlord, not the tenant.
Similarly, rates and water costs also need to be added to the ongoing cost pile.
Getting the balance right
All investing is about balance and when investing for retirement in particular, it’s important to get this balance right.
An investment in property can be a solid addition to a diversified portfolio of retirement assets, but there are financial implications of property investment to consider too.
A good financial adviser will not only assist you to plan your property investment from the outset to work towards your retirement goals, but also crunch the numbers to forecast how investment in property may be impacted by:
- Your personal situation
- Potential age pension payments, superannuation and other income streams.
Speak to a financial adviser
Before you start making offers on houses, give our team at First Financial a call to arrange an obligation-free discussion about your investment goals.
No ‘one size fits all’ approach works when it comes to using property to fund your retirement, and we can help you to navigate this complex investment option.
Our qualified team is committed to helping Australians retire how and when they choose.