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The Problem with Property Investments in Retirement

Property as an Investment during Retirement - Fit for Purpose?

Australians have had a long and enduring attraction to "bricks and mortar" investment. Research by Morgan Stanley, the investment bank, indicates that the number of households with multiple investment property has grown strongly in recent years. About 1.5 million households now have one investment property, about 384,000 households own two properties and 18,000 households own five!

Strong capital gains over the last 20 years, and a supportive tax system, means that property investment is a legitimate investment option while accruing wealth, but it may not be as suitable in retirement - because of the relatively low yield and the lack of liquidity.

Consider the analysis completed below by William Buck in 2018, based on current benchmark rents for a house, or two apartments, valued at $2M in total after deducting routine expenses involved in running investment property. It assumes no mortgage, that the property is not held within a SMSF and excludes capital spending, such as replacing carpets or an oven. In other words, this is a conservative analysis and even in this situation returns barely match inflation.

Example: Property Yield, Eastern Suburbs Sydney

 
House Value $2M
%
$ per annum
2 x $1M Units
%
$ per annum
Rent
2.46
49,164
3.22
64,310
Vacancy Rate
10.0
-4,714
13.0
-8,105
Strata
0
0.3
-6,000
Land Tax
-6,036
0
Insurance
-1,182
-834
Repairs & Maintenance
-2,000
-4,000
Water
-1,114
-1,500
Council Rates
-1,186
-1526
Agents Fees
5.0
-2,458
5.0
-3216
Net Income
30,473
39,130
Net Yield
1.52%
1.96%

Even if you believe that the long-term capital gains available in the real estate market are attractive, how do you convert them into income? Basically, you have the choice of either selling the asset, and this is simply a "lumpy" conversion involving a significant part of your asset base, or mortgaging the property.

Because of the lumpy and volatile nature of the income stream, you also probably need to hold more of your asset base in liquid funds than would otherwise be the case - and this has an associated opportunity cost. Remember, that if your property is in a SMSF - and a whole industry has seemingly developed around this investment approach - then you are required to drawdown a minimum percentage amount from your super funds each year. For comparative purposes the % amount and $ value, based on a $2M fund are shown in the table below.

Super: Minimum Drawdown requirements by Age

Age
% Minimum Drawdown
$ Annual Drawdown
Under 65
4.0%
80,000
65 - 74
5.0%
100,000
75 - 79
6.0%
120,000
80 - 84
7.0%
140,000
85 - 89
9.0%
180,000
90 - 94
11.0%
220,000
95+
14.0%
280,000

Given the yields illustrated above, these drawdown requirements are not going to be possible without significant liquid investments also being held within the fund and there is an obvious potential for a lack of liquidity to result in the "unplanned" and perhaps sub-optimal sale of an investment property. This has particularly been an issue during the Covid 19 pandemic where rental returns have often been disrupted as a consequence of tenants losing employment and vacancy rates have generally increased.

Directly held property can form part of a retirement investment portfolio but it should generally not dominate the portfolio and advice should be taken (and regularly reviewed) to ensure that the portfolio is adequately diversified and the issue of liquidity has been very carefully considered.

 

If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.