Living Off Investment Properties in Retirement

September 15th 2020 | Categories: Retirement | Home Loans & Leveraging Equity |

The Australian dream of owning a home still stands. For many, home ownership forms part of their retirement investment plan and can even provide or build part of an income to live off once retired.

Several investment options can form part of your retirement plan, including your superannuation, stocks, shares, bonds, cash and properties. Over the decades, investing in properties has been a popular choice for Australians and is an effective way to diversify your retirement portfolio and reduce the associated risks. On one hand, it can provide you with a secure place to live throughout retirement. On the other hand, additional properties could provide you with an income to live off once you retire, given you have paid off the owing mortgage. So, what do you need to know about including property investments in your retirement plan?

Multiple factors will help you determine your options for investing in property for retirement:

When do you want to retire?

Age is an important parameter to consider while planning for retirement. You need to consider the timeframe of your mortgage and how that works in your current stage of life. The average mortgage term is 25-30 years and the average retirement age is 65.

Those still accumulating wealth early in their working career will have a longer timeframe to invest and prepare for retirement. Your first property may be your family home in your younger years, and you may choose to build on your portfolio using the equity in your first home to purchase a second property.

Additional government incentives are currently making it more achievable for first-home buyers to enter the market. You can read our full article on 5 Hacks to get you into your first home faster here.

If you are closer to retirement age at 55, your timeframe is shorter. However, property investments still pose plenty of opportunities. This is where a great financial plan comes into play, ensuring your investment aligns with your lifestyle, dreams and goals, and sets you up for your ideal retirement.

How much do you need to retire?

The cost of living post-retirement also influences your investment decisions. According to ASFA, a single person requires about $27,814 per year for a modest lifestyle and $43,061 per year for a comfortable lifestyle post-retirement. On the other hand, a couple needs $40,054 per year to live modestly and $61,522 a year to live comfortably. Being clear on your retirement dreams and goals and creating a budget will help you determine exactly how much you need to live on each year.

The value of the property vs return on investment

If you plan to live off rental income to fund your retirement, you must ensure that the return on the property per year covers your cost of living. You may consider investing in multiple properties of smaller value, or one property of larger value. By working with a real estate agent and a financial planner, you can determine what would work best for you, considering mortgage repayments, rental income, additional expenses, and expected capital growth. If you plan to sell the property and live off the total, consider average life expectancy and make the money last during retirement. Since the original purchase date, the value would likely have changed in some way; getting a property evaluation can help determine how much equity you have available on your home.  

Additional expenses on your investment

When considering property as an investment, you should know the additional costs on top of the initial purchase price. Property investment comes with multiple additional costs including insurance, council rates, property management fees, income tax and maintenance expenses.  

You may also be interested in our articles:

• The hidden price of building or buying a home
• Has the Australian dream of home ownership become a nightmare?
• Shares vs Property: What do I invest in?
• 5 Hacks to get you into your first home faster

Ways to Live Off Properties After Retirement

Your timeframe, property value, remaining mortgage and personal goals and needs will all factor into how you decide to use your investment property into retirement. Some of the ways to live off investment properties are:

Rental Income:

You continue to retain ownership of the physical assets and generate an income by renting out the property. The properties can be rented out for residential or commercial purposes, or as vacation homes. Also, significant tax benefits come with owning a rental property.

Capital Appreciation:

If you have owned the property for some time or made significant home improvements, the property will likely have appreciated in value. Instead of renting out the property and living off the rental income, you may decide to sell the property, giving you access to built-up equity. You may live off the total sum, reinvest in shares, downsize into a smaller property, or boost your superannuation.

Given many factors, including property value, return on investment, timeframe and how you live off your investment, there is no one-size-fits-all approach to incorporating investment property into your financial plan.

Investment properties can be a great addition to your retirement plan and have the potential to provide an income throughout your retirement. We recommend speaking with a financial planner to help ensure your investment selection suits you and your goals.

Our lending team can also help you review your mortgage to ensure it is the best for you.

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What you need to know: This information is provided by Invest Blue Pty Ltd. (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice regarding those matters and seek personal financial, tax and/or legal advice before acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.