Can Property Investment Secure Your Retirement?

The reason so many Australians get into property investment is to build wealth to secure their financial futures.

Yet there are plenty of investors out there who become vague when asked exactly how their property investments will help them fund a comfortable retirement.

Many of them realise that investing is a good start, but they don’t always have a strategy in place to make those goals a reality. Some may not even be aware of the options available to them once they reach retirement age.

So how much money do you really need to retire comfortably? And can investing in property really help you achieve your goal?

Wealth building phase

The wealth building phase is also known as the acquisition or accumulation phase. This is where you’re actively building up your net worth. Some people choose to contribute more money into super. Others aim at reducing debt and paying down the mortgage on their family home.

The key to building a healthy property portfolio is to begin investing. Many people tap into the equity they’ve built up in their family home to fund the deposit or to provide sufficient security to purchase an investment property. Many of those investors also choose to borrow all of the funds associated with the purchase, including enough to cover stamp duty and other fees.

It’s also common for many investors to set their investment mortgages to Interest Only payments, so the loan’s principal balance isn’t being reduced. Over a period of time, the value of the property should increase, effectively creating a large amount of equity for the investor.

Wealth protection and management phase

There’s little point in building wealth unless you also take steps to effectively protect and manage the wealth you’ve created. While you’re focused on building wealth, it’s likely you have a professional property manager taking care of the rental side of your property portfolio.

Your property manager will locate tenants for the home, collect the rent, conduct regular inspections, and manage any maintenance or repairs that need to be done on your behalf. Appointing a property manager also leaves your time free to continue earning income and focusing on building further wealth.

You may also have considered ways to increase your rental yields so the rental income you receive from your tenants begins to cover more of the costs associated with owning the property. Protecting your rental cash flow and your investment asset should also include ensuring you have the right insurance in place.

Insuring the building covers the cost of damages. However, landlord’s insurance can help protect you against loss of rental income in certain situations. If your investment strategy relies on rental income to help you achieve your goals, be sure to protect your strategy with the correct insurance coverage.

Retire debt phase

If you’re like most property investors, it’s likely you’ll consider selling your rental properties to pay down any outstanding debt you have. If the property value has increased over time, you have the opportunity to sell the property at a healthy profit.

However, if your repayments were set to Interest Only and you haven’t reduced the principal balance at all, it also means you’re left with a large mortgage that needs to be paid down as well.

Selling the property allows you to pay down any debt you had outstanding over the property quickly. The debt is gone – but so is your rental income.

You may also need to consider the impact capital gains tax may have on your retirement plans after you sell your investment property. You might have a healthy lump sum of cash available after the sale is completed and the mortgage is repaid, but you also need to factor in the cost of any capital gains tax due.

Generate cash flow phase

Once you sell your investment property and have a lump sum of cash in your hand, you still need to consider ways to generate cash flow. After all, that lump sum of cash on its own doesn’t produce an income that can provide a comfortable retirement for you.

There are plenty of different ways to generate cash flow from your investments in retirement. You might choose to deposit your lump sum of cash in the bank and earn a couple of percent in interest. You might opt to put that cash into your super fund and focus on receiving an annuity payment through your retirement.

Alternative options

Of course, not every property investor plans to sell their rental properties to get rid of the debt. Some choose to switch their investment mortgages over to Principal and Interest repayments, so the balance is reduced a little more with each payment made.

If you can manage to repay the entire debt over your investment property before you retire, you have the opportunity to use the rental income it generates to help supplement your retirement income.

There are also investors out there who focused on acquiring more than one investment property during the wealth creation phase. Their objective might have been to sell the one with the most attractive capital growth, giving them a large lump sum of money to repay the debt outstanding on other properties.

No matter what you decide, it’s strongly advised you discuss your options with a good financial advisor. The choices you make to generate income through your retirement have the potential to impact your tax and your financial situation, so be sure you get the professional advice you need to protect your wealth and secure your financial future.

This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.