21 Sep How to include property in your retirement plans
- Advertisiment -
With housing prices climbing by nearly 10% across Australia in 2015 alone, many investors are looking to property to help boost their retirement portfolios. While achieving a profit with one or more investment properties can be done, it does take planning, research and, most of all, time.
What type of property?
For many investors just starting out, using the equity in their existing home to buy an investment property is often the first logical step. Another way to include property in your retirement plans is using your super through a self-managed superfund. According to the ATO, residential property holdings within SMSFs increased by 65% in the last five years. It pays to get advice from an expert if you are considering either option.
Finding a property that will generate a positive income right out of the gate may be hard to find. That’s where negative gearing comes into the picture. A negatively geared property is one that costs more to maintain than it earns, but which offers potential capital growth over the long term as well as tax and depreciation benefits along the way.
The advantage of this strategy is that you may be able to use your growing equity to buy more properties and potentially earn a big profit 10, 20 or 30 years down the line. Indeed, this buy-and-hold strategy is how a number of successful investors use property to fund their retirement.
Where to buy?
The best place to buy property depends on your investment goals. If you’re after capital growth you should consider high-population metropolitan areas that generally offer steady and consistent property demand. For those after higher rental yields, regional areas can often offer more positive cash flow properties, although the trade-off may be greater economic volatility.
When researching areas, be sure to look for signs of a healthy housing demand, including the tenant vacancy rate. A low-vacancy rate (ideally 1% to 3%) means there’s competition for properties, which can help ensure that your investment property will provide you with sufficient capital growth and rental income over the long-term.
As always, do your research and be willing to explore new locations as well as different types of investment properties.
Some risks to consider
The risks of property investing are related to your stage of life. In particular, retired people or those on a fixed income generally need to exercise more caution when investing in property. Because housing markets tend to move in cycles, you can lose money if property prices fall or the demand for rentals decreases. And even in a good market, it can take months to sell a property, should you need to liquidate.
As a property investor, you’ll also have to consider various expenses, including ongoing maintenance costs, repairs, and taxes. A good rule of thumb is to factor in at least $100 to $200 per week in expenses per property. In general, it’s always a good idea to be more conservative than generous in your profit estimates.
While property can have a role in any healthy retirement portfolio, it’s important not to put all your eggs in one basket. When it comes to planning your retirement, the key is to diversify. As always, be sure to consult with your financial adviser to discuss how property investing can be a part of your retirement goals.