Is property a good investment for retirement?

Author: ME

Published at: 8/26/2016 10:55:40 AM


Is Property A Good Investment For Retirement


When you’re ready to hang up your work boots, a rental property can be a useful source of regular income. But there are downsides to consider.


Retirement used to be such a simple concept. Bundy off from work, grab the gold watch on the way out, and register for the age pension as you head to the bowling club or fishing wharf.


These days things are more complex. And it’s not only because we are living longer and have higher expectations for retirement.


We’re increasingly being encouraged to fund our own retirement, and while superannuation is specifically designed for this purpose, it’s not the only investment that is well-suited for a retirement nest egg.


A rental property can offer considerable pluses for retirees though there are drawbacks. Let’s take a look at the plus side first:


The tenant funds your retirement - Just as your boss makes compulsory super contributions on your behalf, the rent generated by an investment property goes a long way towards paying off your investment loan.


Once the debt is cleared, rental income becomes a regular-as-clockwork source of cash in retirement. And it’s all paid for by your tenant.


Generous tax breaks - The tax savings available through negative gearing can be significant, often making a valuable contribution to an investor’s cash flow to help pay off the property while you’re in the workforce.


However by the time you retire, the investment loan may be fully paid off. This could see the rental property shift from being negatively geared to being tax-positive. At this stage you may need to set aside funds to cover the tax impact.


Bear in mind, investors may also be entitled to tax breaks when a property is sold for a profit. If the place is held for over 12 months, an investor can claim a 50 per cent discount on capital gains tax. It’s a good reason to regard your property as a long term asset, and for retirees in particular, tax breaks add up to extra income.


Long term capital gains - Choose a property in a growth location and the capital gains can be spectacular. Over the last decade property values across Australia’s eight state capitals have risen by an average of 5.5% annually[1] - good news for long term investors.


Don’t expect consistent growth though. Property markets can go through periods of little or no growth. Values can even fall at times.


Nonetheless, the overall picture for property is bright. With our population forecast to grow to almost 40 million by 2054[2], investors should do very well from property over time.


Control - When it comes to personal wealth many of us, quite naturally, want to take control of the reins. A rental property lets you do just that.


Not only can you select exactly which properties you wish to invest in; you set the asking rent; handpick tenants and the property manager. Importantly, investors have the ability to add value to their property - independent of market movements - through improvements or renovations. It’s a level of control virtually no other asset class provides.


Growing equity - During our working lives it makes sense to put every available asset to work to build wealth. The equity built up in an investment property is a tremendous resource in this respect, and it can be as a low cost source of funds to grow your property portfolio.


Consider the downsides


Now to the drawbacks of property as a retirement investment. There are aspects of a rental property that need to be planned for in retirement, and investors need to be aware of these.


Ongoing costs - Just like your home, a rental property requires regular maintenance. It needs to be insured, and from time to time things will break down or need to be replaced. Choosing a low maintenance property like an apartment rather than a house can help to reduce maintenance costs (do watch out for strata levies).


Land tax is a further ongoing cost you should be aware of, and here too, the impost on apartments is generally less than for a house in the same suburb.


You can’t sell a bedroom – Perhaps one of the major downsides of property as a retirement investment is that you can’t simply sell a bedroom or a slice of the kitchen if you need to carve off some capital for, say, a round the world trip.


That said, a healthy retirement portfolio should always have a mix of cash-based assets plus growth assets, like property, that deliver the blend of regular income and capital growth that meets your needs.

[1] CoreLogic RP Data Hedonic Home Value Index, November 2015 Results Released: Tuesday, December 1, 2015

[2] 2015 Intergenerational report Executive Summary