Using Property to Retire Well

Some retirees rely solely on their rental incomes from their investment properties to fund their retirement. Others use it simply to enhance their lifestyle, regarding it as nice-to-have additional income — and of course many retirees don’t own rental property at all.

Luke Harris

Luke Harris

Let’s answer the three most frequently asked questions by people considering investing in property to help fund their retirement.

1. What exactly is property investing?

Property investing can mean different things to different people. Firstly, there are different subsets of property including broadly residential, commercial (retail, office, warehouse), industrial and/or agricultural. Then on top of that, within each subset there are different ways to invest.

For example, with residential property you might apply a renovation, subdivision, or development strategy or simply use a buy and hold approach. Obviously, the investment results (or outcome) are going to be different with each strategy, as will be the amount of skill, time, risk and reward required to successfully implement each strategy.

Additionally, whether you purchase the property in your own name(s), a company or trust name or through your self-managed superannuation fund (SMSF) will make a difference to how the returns are taxed — particularly when it comes to income tax & Capital Gains Tax (CGT) post-retirement.

2. Who is typically investing in property?

If you look at data from the Australian Tax Office (ATO) you will see that for the financial year 2014-15 just over 2 million Australians claimed an interest in an investment property. This equates to around 8.6% of the estimated resident population of Australia, which was 23.8 million according to the ABS as of 30th June 2015.

Interestingly, the vast majority of Australians will only own one or two investment properties, and around two-thirds of investment properties are negatively geared with an average loss of $10,947 per property. The remaining one-third of positively geared properties saw incomes of $9,075 per property.

An article published in The Conversation in August 2017 described the average property investor. He is a 42-year old male (men are twice as likely as women to invest in property) who was married (72% of the time) and had an average net monthly income of $6,617 ($79,404 per year).

3. What sort of returns can you expect from property?

According to the 2017 Russell Investments/ASX Long-term Investing Report, residential property was the top-performing asset class in 2016 and, on average, for the last 10 and 20 years you could have expected gross average return of between 8.10% p.a. and 10.30% p.a. However, with the national average gross rental yields in Australia being just 3.69% to May 2018 according to Corelogic, the bulk of these returns would be due to appreciation in capital growth rather than income.

However, the problem with averages is that they will not necessarily apply to your property purchases. For example, it is possible to invest in higher yielding residential properties such as dual income properties, or to use online platforms such as to access short-stay or holiday let accommodation markets to achieve up to 40% higher gross yields than traditional long-term tenancies.

Interestingly, ATO 2015-16 data on SMSFs found that while SMSFs now make up 30% of all super assets, direct investment in residential property only makes up 4.4% of all SMSF assets, and direct investment in commercial property comes in at 10.4%. This may reflect the fact that typically commercial property provides greater yields (to compensate for what are often lower capital growth properties) than residential property and as SMSF trustees search for yield in the low interest rate environment we find ourselves in over recent years.

Now, of course these are generalisations. It is possible for savvy investors to achieve yields ranging from as low as 2% p.a. to 20% p.a. or even more using property-based investment strategies.

We highly recommend that no matter your age, your current asset base, or whatever income you are aiming to achieve in the future that you have a clearly defined wealth plan, that you surround yourself with great people, and you start your investment journey as soon as possible to give yourself importantly the time you need to achieve all of your life goals.

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