A Guide to Investment Properties in Retirement

Are you approaching retirement age and looking for ways to secure your financial future? Property investment can be a smart move for those looking for a stable income stream.

However, with the current economic climate and fluctuating property market, navigating the world of investment properties can be challenging.

That's why we've put together this comprehensive guide to investment properties in retirement in Australia to help you make informed decisions about your financial future.

In short, our guide covers everything you need to know about investing in property for retirement, from finding the right property to financing and managing it.

So, whether you're a first-time investor or have experience in the property market, our guide will provide you with valuable insights and tools to help you make the most out of your investment.

Are you ready to take control of your financial future? Let's dive into the world of investment properties in retirement in Australia.

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

Is Buying a Home a Smart Investment for Your Retirement Years?

1. Rental Income

You keep full ownership of the tangible assets while at the same time benefiting financially from the rental of the property.

It is possible to rent out the properties for either residential or business usage, as well as for the purpose of a vacation home.

If you own a rental property and have taxable income, you might qualify for some tax advantages, but this will depend on your financial condition and how much you make.

If we are discussing the tax advantages available to you during your retirement phase, we wouldn't be shocked if you were not taking advantage of any of those tax benefits.

It is highly likely that the amount of your retirement income subject to taxation is either below the level at which taxation begins, or it is at a rate significantly lower than the marginal tax rate.

Please revisit your retirement preparation and tax planning if you are finding that you are paying a large amount of taxes after you have retired since this shouldn't be the situation.

2. Capital Appreciation or Capital Growth

Your home's worth can increase if you have been the property owner for a period of time or if you have made major renovations to the house.

If this is the situation, one option open to you is to sell the home in order to free up equity for use in other potential investments.

You may choose to live off the unlimited cash, reinvest in shares, move into a smaller residence, or improve your superannuation by making any of these decisions.

Just ensure that you completely understand the Capital Gains Tax before you sell your property.

How to Invest in Real Estate to Generate an Income During Retirement

Although many people who invest in real estate are aware of their desire for their properties to serve as a replacement for their income, the vast majority of them do not give any thought to how they will reach the point where they are no longer financially dependent on their investments.

They do not have a plan of action. They do not have a strategy in place. They only have faith that it will take place.

Yet, in my experience, most investors don't actually manage to support themselves with the money they make from their rentals.

It is just not possible to build a portfolio of cash flow-positive properties that is large enough to replace your current income due to the difficulty involved.

On the other side, the wealthy investors that we work with have created a cash machine by growing a substantial asset base of high-growth properties and then lowering their loan-to-value ratios (LVR) in order to move on to the next step of their investment life, which is the cash flow stage of their investment life.

This has allowed them to transition into the cash flow stage of their investment life.

They use a number of strategies to bring down their LVR. They were able to:

• They need to stop (or at least slow down) the rate at which they are purchasing properties so that the value of their portfolio can continue to rise while their loans remain mostly unchanged.

• Improve the value of their holdings by generating capital appreciation through enhancements such as remodelling or new construction.

• Pay off a few of their debts with the money from their superannuation.

• They reduced their debt by making payments towards both the main and the interest.

• Sell one or two of your properties.

Yet, the first step in their plan to amass wealth remains the accumulation of a significant asset base.

Why Can’t I Just Make Do With the Rent Money?

Let's imagine that your goal is to have an annual income of $100,000 after taxes. What are the steps you plan to take to accomplish that? How many different kinds of real estate do you require?

Suppose you intend to eliminate your debt and support yourself through rental income finally.

In that case, you will likely require no less than $5 million worth of properties that are free and clear of any mortgages in order to earn an after-tax income of $100,000 per year.

To be kind, let's say that you get a yield of 4% across all of the properties in your portfolio, even though the estimated gross yield for well-located properties in Australia is somewhere around 3%.

This indicates that you will receive $40,000 in rent if you finally buy $1 million worth of properties free and clear of any debt.

However, you will still be responsible for making payments such as rent, taxes, agents' commissions, and repairs, which will leave you with approximately $30,000 each year. After that, you'll be responsible for making tax payments on this income.

If you do the math, you'll realise that you must have an unrestricted portfolio worth at least $5 million in order to achieve the $100,000 after-tax income that you wish to make each year.

Keep in mind that this implies that there is no mortgage debt associated with the $5 million worth of property; otherwise, your cash flow will be reduced. You will, of course, also be required to own your own house free and clear of any mortgage or other liens.

Do you think you'll ever be capable of putting away $5,000,000? Can you ever be able to construct a portfolio of that scale with a positive cash flow of only a few dollars each week from your rent?

It ought to be obvious at this point that the only way to construct a sizable asset base is to capitalise on leverage and multiply the growth of properties strategically positioned in desirable market areas.

To our way of thinking, the only way of becoming economically secure through real estate is first to build up a sizeable asset base (by investing in high-development properties) and then move on to the next step, which is the cash flow phase, by reducing your debt but not entirely paying it off.

This is the only way we can envision someone becoming economically secure through real estate.

Maintaining One’s Standard of Life in Retirement With Rental Income

This is how the process goes. Imagine that 10–15 years from now, you have amassed $5 million worth of well-located investment properties and that you are the proud owner of your own home.

You will be considered to have a negative gearing ratio when you have a typical LVR of 80%.

On the other side, if you did not have any debt against your property portfolio, though you might have positive cash flow, you will be giving up the advantages of using leverage.

Your real estate investment portfolio would be self-sufficient somewhere in the middle, perhaps with an LVR between 45 and 50%.

It's possible that you'll even have some cash flow left over, but it won't be enough to support you.

If you give it some thought, you'll realise that it will be a lot simpler to build a property portfolio worth $5 million with $2.5 million in debt than it would be to build a portfolio identical in size with no debt at all.

After that, you might visit the bank and clarify that you have a self-funding portfolio that's not dependent on your income and that, in fact, there is little cash left over for workability.

This would satisfy the bank's requirements. You would then ask for an additional loan of $100,000, which would increase your LVR by a little amount.

The excellent thing is that since this cash is not considered income, you will not be required to pay taxes on it. On the other hand, you would be required to pay interest, which you would not be able to deduct from your taxes if you used the cash to pay for your living costs.

This indicates that with the payment of the interest, you will be left with approximately $93,000 to support yourself.

Retirement Planning Tips For Property Investors

1. Understanding Your Retirement Goals

The first thing you should do when preparing for your retirement is to figure out what you want your retirement to look like.

As a real estate investor, you need to take stock of your current financial standing and think about what you want your retirement to look like.

Your goals for retirement should be reasonable and attainable, and they should consider your desired lifestyle, level of health, and level of financial security after retirement.

2. Assessing Your Current Financial Situation

It is essential to the retirement planning that you take stock of your existing financial status.

In order to calculate your nett worth as a real estate investor, you must first do an analysis of your current assets, liabilities, and expenses.

In order to calculate how much you can put away for your retirement, it is necessary to conduct an analysis of your current income and spending.

3. Creating a Retirement Budget

Putting together a budget for retirement is a vital part of the planning process for retirement.

You need to calculate the costs associated with retiring, such as those associated with housing, healthcare, and other aspects of daily living.

While planning a budget for retirement, it is essential to take into account the effects of inflation as well as unanticipated costs.

4. Diversifying Your Investment Portfolio

When you are planning for retirement, it is essential to have a diversified financial portfolio.

You should not put all of your eggs in one basket when it comes to your retirement income if you are an investor in real estate.

To ensure that your portfolio is as secure as possible, you should look into diversifying it by purchasing a variety of assets, such as stocks, bonds, and mutual funds.

5. Maximising Your Retirement Contributions

Maximising your retirement contributions is key to retirement planning.

Putting money into a self-managed superannuation fund (SMSF) or a retirement savings account is something that you, as a real estate investor, should seriously consider doing.

These accounts can help you save for retirement while also providing you with tax advantages.

6. Monitoring Your Retirement Plan

The importance of monitoring your retirement plan cannot be overstated when it comes to retirement planning.

You should make it a habit to evaluate and adjust your retirement strategy on a regular basis so that it continues to correspond with your desired lifestyle in retirement.

In addition, keeping a close eye on your investment portfolio and making any required adjustments to increase the likelihood of a secure financial future after retirement is crucial.

Putting Risk and Reward in Balance

The amount of capital growth an investment property generates, or the amount its value increases, is the primary indicator of the investment's profitability.

If you hang onto an investment property for more than a year before selling it, then only half of the gain that you realise has to be reported on your tax return when you file it.

If you decide to sell it after you retire, the amount of the nett gain you wind up paying might be quite little unless it has earned significant profits.

Contrary to the beliefs of certain individuals, the general rule is that keeping one investment property is associated with a greater level of risk than, for example, investing in a balanced super fund.

If it is in a decent region and has good tenants, the property could potentially outperform the super fund; but you are talking about increased risks by investing a considerable amount of money into just one investment and not broadening your portfolio.

Contrast this to a balanced fund, which is invested in a variety of assets outside real estate, such as hundreds of shares, bonds, cash, and other investments.

A property is indivisible, which means that it does not have any form of diversification. Hence, if you need, for example, $30,000 to purchase a vehicle or go on vacation, you are unable to sell a bedroom—you have to sell the entire property. If you want to sell a bedroom, you ought to sell the whole house.

The fact that you're unable to access the assets for a considerable period of time is typically the primary drawback of super, but as you move closer to the age of 60, this will become a less significant issue.

Based on the specifics of your financial goals and the amount of time you have available for investment, either strategy may be appropriate for you. It is wonderful that you are taking action, as we have already stated.

Simply be mindful of what could go wrong before moving forwards, and give some thought to seeking individualised guidance.

The Drawbacks of Investing in Rental Property

• Very high starting expenses, which almost always make it impossible to buy the asset entirely; as a result, financing is required. But, if you are in retirement, you should not make this purchase because any interest expenses would merely reduce the rental income you receive, and this is not sound planning for retirement.

• Insufficient diversity - how many different homes are you able to purchase? And please do not put all of your retirement funds into a single investment property in order to fund your retirement; even if this has been your lifelong desire, you still need to diversify both your assets and your income in order to have a comfortable retirement. Do not put yourself in a position where you are forced to rely on a single income stream, particularly with the property in which you're dependent on this one physical person called a tenant – covid is the ideal moment to demonstrate what tends to happen when problems arise, and they're completely something beyond your control.

• Illiquidity means that you are only able to sell the entire asset or nothing at all; you are unable to sell just one window even if you've got an urgent debt to pay.

• There is a possibility that there will be issues with the property below, which could result in a very pricey undertaking.

• The possibility of having no tenants or a tenant that causes problems is a potential nightmare.

• The high recurring expenditures involved, and how they will affect the level of retirement income you receive, will be covered in just a moment.

• The rental income you receive can become a dependable source of additional revenue to complement the money you bring in from your other sources of income, provided that you have tenants who are also dependable. This, of course, is something that the state of the economy will determine in Australia, interest rates, the location of your home, the price of rent you require, the level of income potential tenants have, and a multitude of other considerations.

Bottom Line

When it comes to financial preparation for retirement, purchasing investment properties that provide a stable income stream and the possibility of long-term growth can be an excellent decision.

But, before going in headfirst, it is crucial to complete the necessary research and make decisions based on that information.

This article has offered a detailed review of investment properties in retirement, including the benefits and downsides of owning investment properties and the many types of properties and financing methods that are now available.

Now that you better understand investment properties in retirement, it is time to start thinking about your financial goals and how they align with real estate investing.

You can do this by thinking about how you want to spend your retirement and how real estate investing can help you achieve those goals.

Are you thinking about buying a house you can rent out to make money? Or would you be more interested in pursuing a "repair and flip" strategy?

No matter what strategy you choose, you should always seek the guidance of professionals and try to make decisions that align with your long-term financial goals.

In light of the fact that you plan to retire someday, what kind of real estate investment do you believe would be most appropriate for you? Leave a comment below with your views and opinions!

Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.

Content Summary

• If you own a rental property and have taxable income, you might qualify for some tax advantages, but this will rely on the specifics of your financial condition and how much you make.
• If this is the situation, one option open to you is to sell the home in order to free up equity for use in other potential investments.
• It is just not possible to build a portfolio of cash flow positive properties that is large enough to replace your current income due to the difficulty involved.
•  On the other side, the wealthy investors that we work with have created a cash machine by growing a substantial asset base of high-growth properties and then lowering their loan-to-value ratios (LVR) in order to move on to the next step of their investment life, which is the cash flow stage of their investment life.
• This has allowed them to transition into the cash flow stage of their investment life.
•  Suppose you intend to eliminate your debt and support yourself through rental income. In that case, you will likely require no less than $5 million worth of properties that are free and clear of any mortgages in order to earn an after-tax income of $100,000 per year.
•  If you do the math, you'll realise that you must have an unrestricted portfolio worth at least $5 million to achieve the $100,000 after-tax income you wish to make each year.
•  At this point, it ought to be obvious that the only way to construct a sizable asset base is to capitalise on leverage and multiply the growth of properties strategically positioned in desirable market areas.
•  To our way of thinking, the only way of becoming economically secure through real estate is first to build up a sizeable asset base (by investing in high-development properties) and then move on to the next step, which is the cash flow phase, by reducing your debt but not entirely paying it off.
•  On the other side, if you do not have any debt against your property portfolio, though you might have positive cash flow, you will give up the advantages of using leverage.
• If you give it some thought, you'll realise that it will be much simpler to build a property portfolio worth $5 million with $2.5 million in debt than it would be to build a portfolio identical in size with no debt at all.
•  After that, you might visit the bank and clarify that you have a self-funding portfolio that's not dependent on your income and that, in fact, there is little cash left over for workability.
• This would satisfy the bank's requirements.
• On the other hand, you would be required to pay interest, which you would not be able to deduct from your taxes if you used the cash to pay for your living costs.
• As a real estate investor, you need to take stock of your current financial standing and think about what you want your retirement to look like.
• It is essential to your retirement planning that you take stock of your existing financial status.
•  When planning for retirement, having a diversified financial portfolio is essential.
•  Maximising your retirement contributions is key to retirement planning.
•  The importance of monitoring your retirement plan cannot be overstated when it comes to retirement planning.
• If you hang onto an investment property for more than a year before selling it, only half of the gain you realise has to be reported on your tax return when you file it.
•  Contrary to the beliefs of certain individuals, the general rule is that keeping one investment property is associated with a greater level of risk than, for example, investing in a balanced super fund.
•  Based on the specifics of your financial goals and the amount of time you have available for investment, either strategy may be appropriate for you.
• And please do not put all of your retirement funds into a single investment property to fund your retirement; even if this has been your lifelong desire, you still need to diversify both your assets and your income to have a comfortable retirement.
• Do not put yourself in a position where you are forced to rely on a single income stream, particularly with the property in which you're dependent on this one physical person called a tenant – covid is the ideal moment to demonstrate what tends to happen when problems arise. They're completely something beyond your control.
•  The possibility of having no tenants or a tenant that causes problems is a potential nightmare.
•  The high recurring expenditures involved and how they will affect the retirement income you receive will be covered in just a moment.
•  The rental income you receive can become a dependable source of additional revenue to complement the money you bring in from your other sources of income, provided that you have tenants who are also dependable.
•  When it comes to financial preparation for retirement, purchasing investment properties that provide a stable income stream and the possibility of long-term growth can be an excellent decision.
•  Now that you have a better understanding of investment properties in retirement, it is time to start thinking about your own financial goals and how they align with real estate investing.
• You can do this by thinking about how you want to spend your retirement and how real estate investing can help you achieve those goals.