Buying Property For Retirement Income

Updated July 2021. 9 Minute Read. 

Are you financially prepared for retirement? It’s a question a lot of Australians should ask themselves. The financial wealth you’re accumulating now can have a big impact on your retirement lifestyle. Many Australians have backed themselves by investing in property as soon as they can. 

Establishing a property portfolio has been a proven strategy for people building their own wealth during retirement. A good buyers agent will tell you that it’s not always about the number of properties you have. Sometimes it’s the value of the house that can make it a more viable investment.

It’s also important to look ahead and have a clear strategy in mind. You can’t just buy property after property and expect everything to work out. It takes years of careful planning. You need to know the right time to adjust your finances and make the transition to making your investment properties the primary source of your cashflow. 

With the right plan in place, you can set yourself up to use investment properties as the primary source of your retirement income. 

How To Prepare For Retirement

Crunch the numbers

To start your property buying strategy it’s important to establish your annual tax after income. How much do you want to make each year to lead the lifestyle you want? Find that sweet spot and stick with it. Once you have a number in mind, you can move onto the next phase of your planning.

The average gross yield for property in a good Australian suburb is roughly 4.5%. So if you own a property with $1 million, you’re likely to earn around $45,000 a year. But don’t forget there’s still plenty of other expenses to take care of for your investment property. There are council rates and commission rates for real estate agents. 

Maintenance and repairs can also set you back each year. Maintenance costs can vary depending on how old your house is or what condition it’s in. On top of all these expenses, you’ll need to pay taxes on your rental income. These taxes include income tax and capital gains tax. But keep in mind that there may be tax offsets that you could be eligible for. 

The total sum of your maintenance costs and taxes could end up leaving you $10,000 out of pocket. So if you were aiming to earn over $100,000 a year from a rental income, you would need a property portfolio worth over $4 million. 

Looking for great advice on buying property for retirement income? Ask the experts at Wise Real Estate Advice.

Plan for a steady growth in assets

Not many of us have the luxury to purchase millions of dollars in property in one go. It will most likely take you years to accumulate that many assets. Gradually adding to your portfolio is one of the safest strategies to follow. You can use capital growth to increase your portfolio over the years. 

Capital growth can make it possible for you to buy another property by using the equity from your previous one. For this strategy to work, it’s best to wait until the equity in your first property grows. In Australia, it’s fairly common for a house to almost double in value every ten years. You can use this figure to set up your timeline for buying investment properties. 

So let’s break this strategy down to its simplest form. A bank lets you borrow money based on how much you already have in assets. When you acquire more assets, you can borrow more money from the bank. So acquiring more properties over the years will continue to increase your capacity to borrow money from the bank. 

When it comes to acquiring assets you don’t have to think big. Start off small by trying your luck with units or apartments. You don’t need to purchase four bedroom family homes in established neighbourhoods. Sometimes property investment is a slow burn that can really pay off when you give it a chance. 

Looking for more solid advice on property investment? Listen in to the Property Investor Podcast. 

What are the risks with property investments?

So does buying property for a retirement income sound too good to be true? There are definitely some risks involved. First off you need to consider the fact that the costs of maintaining your investment properties will continue to increase. 

A market downturn could also have a serious effect on your investments. A perfect example is the effects of COVID-19 in Victoria. Imagine buying an investment property just before COVID-19. The average rent for your property’s suburb may have been substantial enough to cover mortgage repayments. But what if during COVID-19 you find it difficult to find tenants that can afford your desired rent for the property? 

A sudden rise in interest rates could also affect your ability to pay off an investment property. Raising the rent of your property isn’t always an easy fix that’s available to you. And imagine the financial stress you could be under if you suddenly had to pay a higher interest rate on multiple properties at once? These are worst-case scenarios but nevertheless, they are still possible.

So it’s important to be aware of all the risks involved with property investments. The more you know, the more prepared you can be in case anything goes wrong. Never spend beyond your means when it comes to buying an investment property. A good buyers agent can assist you with searching, inspecting, and assessing potential investment properties.

Faster ways to gain income through property

Investing in property for retirement doesn’t have to be a long term project. There are faster ways to build wealth using property investment. A popular option is called ‘house flipping’ which involves buying, renovating, and selling a property for higher than its original value. Savvy property investors usually target houses that are in desperate need of renovations.

When you’re looking for houses to flip it’s important to consider all the things that will make them valuable after a renovation. Is the house in a good location? Is it close to schools, shopping centres, freeway entrances and public transport? A lack of these amenities can make it difficult for a house to rise in value no matter how well you renovate it.

Employ the right tactics for this method and you can start to make big profits out of this type of property investment. But there are certain things you need to be cautious about like over capitalising on your investment. If you invest too much into renovating an investment property your profit margin could end up being significantly less than you imagined.

One of the ways that a lot of property flippers like to make these investment properties more profitable is by doing the renovations themselves. You can save thousands on the cost of hiring labour. Just be wary of the level of skill and tools required for making these renovations. You also need to consider the investment of time here. Are you willing to put in the days to renovate these properties? Is this manual labour really what you had in mind when you pictured retirement?

Renovations that increase your revenue

Whether you’re looking to flip your investment property or keep it long-term, there are plenty of ways you can increase your revenue from it. A popular option is to renovate your investment property. When you decide on what to renovate for your property, think about the most wanted house features for your buyer or tenant demographics.

Different areas attract different demographics of people. For example, an inner-city suburb is more likely to attract singles or couples looking to live close to the city for work who don’t see parking spots or a backyard as essential. Houses in the outer suburbs are more likely to attract those who are looking for a spacious backyard, garage and multiple bathrooms. 

So try identifying the demographic you’re after and base your renovations on them. A newly renovated kitchen is sure to attract a wide range of demographics. A separate master bedroom with an ensuite is likely to attract growing families. So why not try and renovate a house by adding an extra bathroom and walk-in robe? Bigger families also appreciate features like a study space. These are highly sought after now that more people are looking to work from home. 

There are clever ways to make more with what you have. Newer style homes tend to prioritise open plan living. This involves transforming the family room and kitchen area into one big living space. Older style homes tend to have these rooms separated by walls. A relatively easy fix is to knock down walls. This helps to open up an old home and give the illusion of more space. 

After your new renovations are complete it becomes easier to justify a rise in property value or rent. With more wanted features in your property, it’s likely to spark more healthy competition from bidders and more interest from potential tenants. 

Using a subdivision to your advantage

Does doubling your profits with a property sound too good to be true? It is possible by getting a subdivision for your property. A subdivision involves separating one piece of land into two separate pieces of real estate. Each piece ends up having its own land title. There are many ways you can use a subdivision to increase your retirement income. 

Say for example you purchase a property worth $800,000. If you are lucky enough to have a big backyard, you could subdivide the property. The backyard becomes a separate land title that you can build a new property on. The new property could end up having the same features such as four bedrooms and a garage. In two years time, you could sell both properties for $800,000. 

After subdividing your property you could rent out houses from both land titles. This effectively doubles your rental income. Alternatively, you could rent out the newer property and sell the other. Doing this ensures you make a profit off the property you sold before having to spend more on maintenance down the track. Renting the newer property will be more profitable because there will be less maintenance involved. 

Investing with your super

This is one option many property investors don’t consider straight away. Your super is essentially a lifelong investment that you’ve been holding onto for your retirement. So dipping into it does sound risky. But options like a Self Managed Fund (SMSF) do make it easier for you to invest your super the way you want. What’s more important is that it can allow you to access your super a lot sooner than you planned. 

A popular option is borrowing against the value of your property for investment. This strategy can enable you to take advantage of tax benefits. You may even be able to grow your property portfolio much faster with the help of your SMSF. Just make sure you enlist advice from professional finance experts. An SMSF requires constant attention to detail and maintenance to get it right. 

In order to attain borrowed money from an SMSF, property investors often use Limited Recourse Borrowing Arrangements (LRBA). This investment method involves SMSF trustees using the beneficial interest in the purchased asset. The only catch here is that the legal ownership of the asset is held on trust. 

One benefit of an LRBA is that your super fund will not be at risk if the loan has defaulted. One of the main tax benefits of using an SMSF is that your super fund will only be taxed at 15 per cent. This rate is considerably lower than the tax rate that most people around Australia have. Another great advantage is that if your investment property is sold during the accumulation phase, your capital gains tax on it will be calculated at a discounted rate. 

What are the risks with property investments?

So does buying property for a retirement income sound too good to be true? There are definitely some risks involved. First off you need to consider the fact that the costs of maintaining your investment properties will continue to increase. Essential trade professionals like electricians, plumbers, and gardeners don’t stay at the same price. Their rates gradually go up to just like the cost of living.

A market downturn could also have a serious effect on your investments. A perfect example is the effects of COVID-19 in Victoria. Imagine buying an investment property just before COVID-19. The average rent for your property’s suburb may have been substantial enough to cover mortgage repayments. But what if during COVID-19 you find it difficult to find tenants that can afford your desired rent for the property? 

A sudden rise in interest rates could also affect your ability to pay off an investment property. Raising the rent of your property isn’t always an easy fix that’s available to you. And imagine the financial stress you could be under if you suddenly had to pay a higher interest rate on multiple properties at once? These are worst-case scenarios but they are still possible.

So it’s important to be aware of all the risks involved with property investments. The more you know, the more prepared you can be in case anything goes wrong. Never spend beyond your means when it comes to buying an investment property. A good buyers agent can assist you with searching, inspecting, and assessing potential investment properties.

Set yourself up for success 

Is your dream to retire on the income of your investment properties? That dream can become a reality with a combination of time, research, and the confidence to take a risk. There are always going to be risks associated with property investments. So back yourself by being prepared.

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Buyers Agents For Retirees & Seniors

It’s also important to note that buying property for retirement income isn’t something that happens overnight. It can take decades for everything to fall in place for you. You may ask yourself when is the right time to invest in property. The answer is knowing when you’re ready. When you know all the risks involved, you’ll be ready to make the right decision. When you have a carefully thought out timeline and strategy, you’ll know the right time to start investing.

So set yourself up with some realistic goals. Do your research and be confident in what the future holds for your investments and your retirement. Read articles, listen to podcasts, and don’t be afraid to ask for advice whenever you have the chance. Buying property for retirement income is a massive decision that’s likely to affect the rest of your life.

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