There are many options when saving for retirement. So, what happens if we go down the property investment route? What are the risks? And does it guarantee an income for retirement? Debra Halton explores with her top five tips
1) What goes up must go up … or can it also go down?
Property investors seeking capital gains can get tripped up by their belief that prices only ever go up. Historically, property prices typically experience net gains over time, but they also move through cycles. For example, for a long period, the Wellington market has sat in a kind of stagnate position. Wellington homeowners will see that the majority of growth in their homes over the past decade has taken place in the most-recent 12 months.
2) Make the most of leveraging
The beauty of investing in property is the ability to leverage borrowed funds in order to boost returns. For example, suppose I buy a $500k house with a $100k deposit. If the value of that house were to go up by five per cent in a year, my equity in the house becomes $125k at year-end.
Over time, this ability to increase equity as a result of borrowed funds builds up, meaning you can then take equity out and choose to re-invest in another property.
3) Play the long game
Property investment is not about short-term gain. For reliable results, you need to be in it for the long haul. Historically, over a 10-year period, property prices may double, but there is always the risk of the market realigning and values dropping. We are seeing this right now in Auckland where prices seem to be dropping slightly, with stories of people selling under their listed sale prices.
4) Recruit your dream team
Property investors can avoid mistakes by getting good advice. This means teaming up with an accountant who has experience in property investment, a lawyer who sets up the right ownership structure (i.e. you may need a trust, a look-through company or a partnership—trusts are great for assets protection but can be bad for tax efficiency), and a mortgage broker.
On the last point, getting money from a bank can be relatively straightforward, but finding the best lender for your needs and structuring the mortgage in a way that pays down the debt as fast as possible and suits your situation is where mortgage brokers really come in to their own. Plus, the mortgage broker will help you review things regularly in response to changes in the market and your own circumstances.
5) Let the managers manage
Increasingly, few landlords are able to manage their own properties. Aside from the demands of modern life, the ever-changing regulative rules surrounding rentals can be daunting to get your head around and keep on top of.
We suggest employing a property manager. They charge approximately eight per cent of the rent. It's a small price to pay for peace of mind. And, for some landlords, not having the stress of dealing with tenants is worth the drop in rent returns. Besides, how often do we, figuratively speaking, “do a drive by” or “unblock the drains” of our KiwiSaver accounts? We leave that for the financial investors to manage. So, why do we try to “do it all” with property?
In summary …
To improve your chances of living off property in your retirement, get advice, surround yourself with experts, play the long game, leverage, and be aware of short-term cycles.
Will you have enough money to live off? Well, no one has a crystal ball and most agree that doing something towards retirement is better than nothing.
Debra Halton is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.