Funding Your Retirement With Property Investments

Many people live for twenty or even thirty years in retirement, so it’s important to consider how you’re going to fund those golden years! Whilst there are lots of investment options for people now, investing in property is no doubt one of the most popular ways to build wealth for your retirement, especially in New Zealand where owning one or more properties is a right of passage for many Kiwis. While investment properties can be a great way to boost your retirement income, it’s a good idea to consider all your options and weigh up the pros and cons, so you can make an informed decision.

Considering your options

Investments will generally fall into two categories – growth assets and income assets. Income assets like bonds are great for providing ongoing cash flow, but you won’t get a significant return once they’re sold. Property is a growth asset – something you’ll most likely invest in for the long term due to Capital Gains Tax on short term property investments. While growth assets still generate some income, for example renting out your investment property, you stand to reap the bigger rewards in the form of capital gains when it’s sold. 

While property investment is a good way to build wealth up to the point of retirement, the property market has growth and decline cycles just like any other growth asset, so investors need to be prepared to stay in it for the long haul, until they can sell at the right time in the cycle.

The pros of owning an investment property in retirement

Capital gain – We know property is a growth investment, and if you’ve owned one (or more) properties for a while and/or have made significant improvements and renovations, it has most likely grown in value. That’s very good news, because growth in value can also mean higher rental rates and returns!

The equity – It’s possible to live off the equity of your investment property, but it involves some forward planning. You’ll need to pay off as much of the mortgage as you can while you’re still working to reduce the loan-to-value ratio, so you can borrow against the equity if you need it. It’s tax free because it’s effectively a loan and not an income, but it’s still not for everyone. As with any investment, there are risks and limitations.

Low outgoings (if you’re handy) – some Kiwis love to DIY! If that’s you, it’s easy to save on maintenance costs by doing things yourself. You might also have formed great relationships with tradespeople over the years, so when repairs pop up, you won’t be paying through the nose. Of course, there’s the flipside to that! If you or your partner don’t have that handy streak it can end up costing you more money than you might think, and if you’re renting it out, you’ll be relying on someone else to take care of your home and treat it like you would yourself.

The cons of owning an investment property in retirement

Tenancy law changes – New healthy homes standards and requirements for landlords in New Zealand under the new Residential Tenancies Act mean it’s not as straightforward to own an investment property as it once was.

One might not be enough – On top of mortgage repayments, taxes, and maintenance and repair costs; you can’t always rely on your rental property to be tenanted (although in the current market, that’s unlikely). Some people find they need multiple investment properties to generate enough income to live off.

Income/Capital gains tax – the income from your investment property may be subject to income tax and the bright-line rule (similar to capital gains tax), based on the amount, any other income you have, and how long you’ve owned it for.

The option to sell

If you’ve owned one or more properties for years and know it has significantly gone up in value, you might have the option to sell it to fund your retirement! This isn’t always an easy decision – it might be a family home or bach. If it’s going to be your main income through retirement, make sure it will be enough to fund the lifestyle you want to live, and take into account that you might have to re-buy or rent in the same market.

Talk to the experts (that’s us!)

If you need expert guidance on buying or selling your home or property, Ray White Austar is the leading real estate agency in Central West Auckland. With our wide coverage of 5 offices plus a dynamic rental division, we’ll take care of all your property needs and ensure your golden years are bright! Get in touch with us today, or take a look at our blog on whether to rent, renovate, or sell.