Retirement and property investment – not always the perfect match!

Author: Leigh Jobling, Partner, TAG Financial Services

Anyone who has held residential property over the long term, particularly the last 25 years, would most probably be pretty happy with the performance of their investment.

Apart from a couple of minor falls in value and flat spots, prices have generally trended up. Naturally, some property performs better than others, and houses have generally generated greater returns than apartments (particularly apartments purchased “off the plan”).

Ask someone with an investment property how they feel about their long-term returns, and you’ll hear glowing comments through wide grins – they’ll tell you how much their property has gone up in value.

Ask them about the income and it’s a slightly different story – while rental income is received, often costs such as rates, insurance, land tax, agents fees, etc eat away at the income generated.

While people are fit and healthy, in the workforce and earning good coin – they may not need the income. It’s about long-term capital appreciation and wealth creation. We’ve seen many clients grow their wealth via thoughtful and purposeful property investing.

Consider your retirement income needs

When you start to consider retirement, it’s critical that you re-assess your property investment strategy.

Consider a couple who currently work and together bring home $150K income. They have $800K in super and an investment property worth $1.2M (debt free). They need $120K per annum for living and lifestyle expenses, including a nice annual holiday. The property earns rent of $28,000 and has associated expenses of $12,000 = $16,000 net rental income. They are planning their retirement.

While the property has been a wonderful investment (they bought for $400,000 in 2002), they need to work out how they create a flexible retirement income stream.

The net rent of $16,000 helps, but on a $1.2M property, that’s only a 1.3% yield. A term deposit or dividends on a bank share beats that by 3-4 times.

If they retain the property, the other $104,000 per annum living expenses needs to come from their super. This $800,0000 will run out in around 10 years.

Any lump sums to buy cars, renovate the house or give money to the kids would eat into their super much faster and if they are no longer working, they can’t arrange a loan against their house or investment property.

Needless to say, they can’t sell off 5% of a property to free up some cash. They can run down their superannuation and sell the property in due course, or maybe even downsize their principal residence to provide the liquidity to continue to meet required lifestyle expenses.

Don’t be “asset rich and cash poor”

While this is a simple example, in the years leading up to retirement and beyond, careful consideration should be made to investment strategy to support cash flow. Capital growth is good, but solid income from investments with flexibility to sell a portion to cover unexpected or one-off expenses is critical to a rewarding and stress-free retirement. Don’t be “asset rich and cash poor”. It’s good to have wealth, but if your assets are holding you back, you may need to reconsider your strategy.

Property investment can certainly complement your retirement strategy, but they are not always the perfect match.

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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2023. Please do not reproduce without the expressed written consent of the author.