To construct a balanced investment portfolio, you really should consider having a percentage of your wealth committed to property. Returns from this category have a proven track record over time and property is considered to be a comparatively safe way for Australian investors to build wealth for the future.
In fact, there are a number of Australians who have gone one step further than simply including property in their portfolio and are now devoting a large portion of their asset base to this class with a view to using the after tax returns to fund their retirement.
Here are a few commonly used property investment plans to help fund your retirement:
Plan A – Living off the rental income
Many people create an investment property portfolio with the plan that, one day, the properties will be all paid off and they will be able to live on the rental income. If you are planning to fund your retirement this way, you’ll need to take into consideration that this rental income will be subject to income tax and some of it will also be required for property management, maintenance, insurance and rates. These expenses represent a sizeable chunk of the income that your properties produce – often around 50 to 60% – and need to be taken into account when considering the annual net income amount you require to maintain your desired lifestyle.
It’s definitely possible to create a property investment portfolio large enough to cover these expenses if you start soon enough and plan carefully from the outset. How much income you will need is up to you but note that, assuming you lose 60% of the income to tax and other expenses, then if you want an after tax income of $100,000, you will need to plan to have a portfolio of properties that is generating at least $250,000 a year.
Plan B – Living off the equity
Many property investors take a different approach where, rather than paying off the loans completely, they instead simply reduce the loan to value ratio (LVR) to as low a rate as possible and then fund their retirement living expenses by borrowing against the equity up to this LVR as and when they need it over time.
One of the main benefits of this strategy is that acquiring funds this way does not attract income tax.* However it should be noted that every time you withdraw some of your equity, the repayment amounts and interest due on your loans will rise.
This strategy makes sense as long as both your properties continue to experience capital growth and the rental income from them keeps pace with the increases in your repayments. However, if market conditions create a situation where both rents and property values fall dramatically, you may find yourself in a position where your equity declines to the point where you can’t borrow any more money, or you may need to start selling off properties within your portfolio in order to meet your repayment commitments.
Plan C – Systematic sale of properties within your portfolio
The systematic “selling off” of the properties in your portfolio is also another way to fund your retirement. The challenge with this approach is that you will need to take into consideration capital gains tax implications and therefore need to carefully plan ahead to ensure each sale generates sufficient funds, over and above the tax liability, to meet your needs.
As you can see, there are some very interesting strategies open to investors who view property as a fundamentally sound investment class. Our advice is to surround yourself with a team of quality advisers across the property, financial planning, accounting, legal and mortgage broking fields to help create a robust investment plan that includes suitable corporate structures with lines of credit in place and has identified the appropriate mix of property types and suburbs/regions with ongoing professional management systems in place.
*This article does not constitute tax advice. The information contained in this article is general in nature and does not take into account your personal situation. Tax issues relating to property investment can be complicated and you should always consult an accountant or qualified tax adviser. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice.
About the author;
Andrew Mirams is the Managing Director of Intuitive Finance and is a highly qualified mortgage advisor who holds dual diplomas in Financial Planning (Financial Services) and Banking and Finance (Mortgage Broking). Andrew’s expertise covers all aspects of lending for a diverse range of applications – from first home buyers loans or property upgrader loans, property investor loans, expatriates and loans for self-employed. With over 27 years of experience, Andrew has been acknowledged by the mortgage industry as one of its best performers with multiple awards including regularly featuring in both the top 100 mortgage brokers list and Top 50 Elite business writers. He was voted Victoria’s favourite Mortgage Broker at the 2015 Investors Choice Awards and Intuitive Finance won the 2016 “Best Independent Office (<5 brokers)” and “Best customer Service” at the recent 2016 Better Business Awards. Visit Intuitive Finance for more information.