Should you use property to fund your retirement?
By Robert Wright /February 18,2022/
Superannuation, shares, property, cash, other investments; a dizzying number of options are available when it comes to living comfortably through retirement.
Financial advisers often promote a diversified portfolio to reduce the risk of concentrating ‘all eggs in one basket’. Still, Aussies love their property, with more than 2.2 million of us opting for investing in property, with almost 60% of those aged 50 or over holding property investments.
Aside from simply owning a secure place to live through retirement, investing in property can also provide regular post-work income and might offer some assurance as a ‘safe’ investment option. Property is a physical asset and can seem less volatile than other investments, particularly when heading into a phase of life that holds uncertainty and where you may think: “What happens if I outlive my savings?”
But different risks and tax obligations in retirement can alter the attractiveness of investments and, when it comes to property, there are a range of strategies that offer different pros and cons when using it to fund retirement.
Living off rental income from an investment property
On the surface, living off rental income in your retirement is an attractive prospect. But you may need to first make sure the lifestyle you want doesn’t exceed your investment property’s returns, taking into consideration any mortgage repayments, taxes and maintenance costs, as well as factoring in for times when the property may not have tenants.
Many people find they need multiple properties in their investment property portfolio to generate enough income to support their retirement lifestyle.
Pros of living off rental income
Capital appreciation: If you’ve owned a property for a while or have made significant improvements, chances are it may have grown in value – and may continue to do so. Growth in value can also mean higher rental rates and returns.
Interest rates are at all-time lows: Which means low mortgage repayments, if you have them.
Outgoings can be low: If you’re healthy and handy, you can leverage your free time in retirement to save maintenance costs by doing your own property management and minor repairs.
Holiday ahoy: Many Australians choose to purchase investment properties in holiday locations. When leased, your tenants provide an income stream; when not, you have an instant holiday house for yourself or perhaps a short-term rental.
Cons of living off rental income
Ongoing costs can pile up: In addition to anticipated outlays – property management, insurance and rates – you risk unexpected costs like emergency repairs and oft-forgotten long-term appliance or structural replacements.
Income from your investment property may be subject to income tax: This will depend on the net amount per financial year – and the amount and type of any other income.
Liquidity is restricted: If you need funds unexpectedly e.g. for medical costs, to take a holiday, or for emergencies, you can’t sell a single room of your investment property as you can with shares of stock – the whole thing has to go, and it will take some time before you get the actual sale proceeds.
Your income isn’t guaranteed: the rental market can change, and it might mean that your property can be empty for periods of time.
Living off equity
This option essentially sees you paying-off as much as you can on your property while working (reducing the loan-to-value ratio) and then funding your retirement by borrowing against the equity (the value of your home, less any mortgage) if and when you need it. A number of strategies are available, including home reversion, reverse mortgage and home equity release.
Keep in mind that the amount of money you can access depends on your age, the value of your home and the type of equity release.
Pros of living off equity
It’s tax free: You don’t have to pay tax on this ‘income stream’ as it is effectively a loan.
You can tailor the amount of equity you borrow: Whether it’s regular payments, a lump sum, line of credit or a mix.
You don’t have to sell: If the equity is in your own home, you get to keep living there and you don’t have to make repayments while you do.
Negative equity protection: means you will never end up owing your lender more than your home is worth if you take out a new reverse mortgage.
Cons of living off equity
There are costs involved: Application, service and end-of-agreement fees may apply. Check with your lender as they may vary from lender to lender.
A volatile market: This strategy only works well if your property is increasing in value.
You are converting capital to debt, for yourself or your beneficiaries: Some dub this investment strategy “spending wealth, rather than cash flow.”
The amount you can ‘borrow’ is restricted: If you’re 60, you can only access 15-20% of the value of your home. As a guide, add 1% for each year over 60. Over time, your payback interest rates may be greater than an average home loan. With home reversion, you ‘sell’ a share of your home usually for well under market value.
Selling property to fund retirement
To sell or not to sell? It’s a question many Australian homeowners face as they enter retirement, regardless of whether it’s the family home or an investment property. If this is to be your major income through retirement, check that any profits you reap will equate to comfortable golden years. Also consider the effects of re-buying or renting in the same market if you’re downsizing.
Pros of selling property
Selling your property may mean you have an increased cash flow: You can use it to pay off debt or invest in shares or in managed superannuation funds, which may provide additional tax benefits and liquidity.
You may not have to pay capital gains tax: This may apply if your property is your primary residence, or you purchased it before September 1985.
Cons of selling property
Capital gains tax: When selling an investment property you’ve never lived in, you may be liable for capital gains tax on any profit.
All those costs of selling a property: Real estate agent fees, legal fees, moving costs and so on.
Timing: If you need to sell in a hurry to fund your retirement, you may not be selling into the best market. Liquidating during a market downturn can mean a significant hit to your retirement income.
On the other hand, selling at the top of the market could mean boosting your super balance with a large lump sum, but remember the pension transfer balance cap limits the amount you can invest in a tax effective retirement pension.
Your bank balance: Selling your home may impact the amount of Age Pension you receive.
No one-size-fits-all approach works when it comes to using property for retirement. With so many factors influencing your decisions, it’s wise to consider your options and speak to your financial adviser.
How to help your children with buying property
By Robert Wright /July 16,2021/
With property prices rising at a record rate in many cities across Australia, the ‘bank of mum and dad’ is playing a bigger role than ever as many parents feel pressure to assist their children in buying a home.
For many Australians, home ownership is not just seen as the great Australian dream, but it also represents financial security and an important step in adulthood.
However, rapidly escalating prices, particularly in highly-desirable capital cities such as Sydney and Melbourne, has put that first step on to the property ladder out of reach for many young people. This in turn has led to many children turning to their parents for assistance.
According to the AFR, parental contributions are averaging more than $89,000, an increase of nearly 20 per cent in the past 12 months. In fact, the ‘bank of mum and dad’ has about $34 billion in loans, making it the nation’s ninth-largest residential mortgage lender.
For parents who want to help their children into home ownership, there are a number of strategies and pathways to consider.
Contributing to a deposit
Most lenders recommend prospective home buyers have 20% of their loan available as a deposit, and contributing to this deposit is often what first comes to mind when parents think of how they can help their children, as scraping together a deposit is generally considered the most difficult step in buying a first home.
If you are contributing a cash amount, make sure you have clear discussions with your children about any expectations related to your contribution – for instance, if you are making the contribution in lieu of leaving them money in your will, make this very clear and don’t hesitate to put it in writing, especially if you are doing this for one child but not others.
Acting as guarantor
A guarantor home loan is when someone, in this case a parent, offers up part of their home equity as security to top up the buyer’s cash deposit.
It means the buyer only needs a small deposit or sometimes none at all, and avoids paying costly lender’s mortgage insurance (LMI).
It’s crucial that you only agree to act as guarantor if you have full confidence in your child’s ability to make their loan repayments. If they default, you will be liable and your own home may be at risk.
Providing a loan
Whether through an official loan provider or a private agreement between parent and child, you may be in a position to loan your children the money they need to buy a home or for their deposit.
Keep in mind that this assumes they will be able to make their official home repayments as well as paying back the initial loan, and it is important to have honest discussions that clarify how they will manage this, and a timeframe for repayment.
Always put your well-being first
It may sound selfish and like it goes against what we’re told as parents, but it is crucial that older Australians put their own financial security first.
If you are simply not in a position to assist your child, do not feel pressured to put your financial wellbeing at risk in order to help them, especially if you have doubts about their ability to manage the repayments and responsibility of a home loan.
In this case, have a frank discussion with them about your will and what you will be able to provide for them after you have passed. You can also direct them to seek professional financial advice from your adviser which may help them understand how they can work within their own financial limits to move towards home ownership without your assistance.
Source: Money & Life
Property investment vs shares
By Robert Wright /February 18,2021/
An age-old question is whether it’s better to invest in property or shares. There is actually no right or wrong answer. It all comes down to your preferences and approach to risk.
Both asset classes – shares and property – are considered to be growth investments. In other words, over time, a quality investment in shares or a property could generate capital growth and also produce income from rent (property) and dividends (shares).
The case for shares
Ease of entry into the share market is a big plus for share or equity investors. You can buy into the share market with as little as a few hundred dollars. In comparison, home and apartment prices in our capital cities could easily cost upwards of $1 million. The transaction costs of investing in shares such as brokerage and transaction fees are also significantly lower than the stamp duty and legal fees you pay as a property investor.
Finally, with a share market investment, you could get almost instant access to your money when you decide to sell. Equally, you don’t have to sell the entire investment to get access to some cash. With an investment property, you can’t sell a bedroom to free up some cash – it’s the entire property that goes to market or nothing.
The case of property
A major appeal of owning a property is its perceived stability relative to the share market, where values can vary from day-to-day as a consequence of how easy it is to buy and sell shares. If you’re approaching retirement, this level of volatility may not be for you.
A property investment, on the other hand, gives you a tangible asset that can deliver a sense of investment security as well as some capital growth and income.
Property buyers have the ability to fix the interest rate of a loan, which is another valuable security measure. This means your mortgage repayments will be set for an amount of time, which could be a good option for someone who prefers stability.
Holding an investment property in a self-managed super fund (SMSF)
It is possible to set up an SMSF primarily to invest in property, but be aware, some rules apply to ensure your fund remains compliant. ASIC’s Money Smart website lists the following rules:
- The property must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members.
- The investment property can’t be acquired from a member or related party of a member of the SMSF.
- The property can’t be occupied by a fund member or any fund members’ related parties.
- The property must not be rented by a fund member or any of the fund members’ related parties.
As this shows, there are many reasons to invest in shares and property. For further information about investing in property or shares, or to discuss whether it may be a suitable strategy for you, please get in touch.