In just three months, the proportion of Australians stating that their main property goal is to position themselves for retirement has almost doubled, according to Australian Property Investor magazine.
This suggests a growing trend of individuals looking at property as a key element of their retirement strategy. But is it the right approach for you? Property investment can be a great way to build wealth for retirement, offering the potential for rental income, capital gains and tax advantages. However, it also comes with risks and complexities.
How to use property to boost your retirement
1. Buying through your self-managed superannuation fund (SMSF)
An SMSF allows you to choose how you invest your retirement savings, including through purchasing property.
Potential benefits
- Rental income and capital gains: A key advantage is the potential for two income streams. Rental income provides a regular cash flow, while capital gains – the increase in the property’s value over time – can significantly boost your retirement funds when the property is eventually sold. You can use your rental income to pay off the mortgage while benefiting from capital appreciation.
- Tax benefits: SMSFs have a concessional tax rate of 15% on investment income — in this case, rental income — and potentially zero tax on capital gains if the property is held until retirement and then sold within the fund. This tax-advantaged environment can accelerate the growth of your retirement savings.
Potential drawbacks
- Strict rules and regulations: SMSFs must adhere to strict guidelines set out by the Australian Taxation Office (ATO). First, there are restrictions on the types of properties you can purchase and who is allowed to use them. These rules vary between residential and commercial properties. Second, the property must meet the ATO’s sole purpose test, which means the property is used solely for the benefit of your retirement fund.
- A complex process: Setting up and managing an SMSF is complex and requires specialised knowledge. You’ll likely need professional assistance from financial advisors and accountants, which can add to the costs. Additionally, the process of buying a property through an SMSF can be complicated, requiring a knowledgeable mortgage broker to assist with the loan process.
2. Using equity to buy an investment property
You can use the equity built up in your existing property to invest in a rental property.
Potential benefits
- Potential for capital gain: Historically, Australian property values have risen over the long term. For instance, CoreLogic’s latest home value index shows national dwelling values have grown 70.3% over the past 10 years. If you buy the right property in the right area – where demand is strong and supply limited – you can benefit from long-term appreciation in value. This capital gain can then be used for future investments or wealth-building opportunities.
- Rental income: Like SMSF property investment, a well-chosen investment property can generate rental income, which can help cover loan repayments or supplement your retirement savings.
Potential drawbacks
- Increase debt: Borrowing against your home equity increases your overall debt, adding to your financial obligations. This can be a risk, especially if interest rates rise or your personal circumstances change.
- Market risks: Rental income can be inconsistent due to vacancies or unreliable tenants. If rental income dries up, you could find yourself in a challenging financial position.
Is property right for your retirement?
Choosing if property investment is right for your retirement savings goals depends on several factors. Consider your financial goals, risk tolerance and investment timeline – especially how close you are to retirement age.
If you have a long investment horizon and can handle potential market fluctuations, property may be a good addition to your retirement plan. Consulting a financial advisor can help determine whether property investment aligns with your overall retirement objectives.