How do I use property to fund my retirement?

With interest rates at all-time record lows, property has recently become very attractive to a wider range of investors. The media is full of articles and commentaries talking about using property to help fund retirement, with many even talking about it as a means to completely replace an employment income so they can quit work early.

Whilst property investment has a proven track record as being a comparatively safe way to build wealth for the future, is it really possible to use property as a means of finding financial freedom and funding your retirement? And if so, how do you go about it?

Here’s an outline of two commonly used property investment plans:

Plan A – Living off the rental income
Many people create an investment property portfolio with the notion that one day, the properties will be all paid off and they will be able to live on the rental income. But 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. In other words, a sizeable chunk of the income your properties produce – around 50 – 60% – will be used up before you can allow for your living expenses.

In theory, it ought to be possible to create a property investment portfolio large enough to cover all these expenses if you start soon enough and plan carefully from the outset. How much income you will need is up to you. Considering you will lose at least 50% of the income to tax and 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 $200,000 a year.

Plan B – Living off the equity
Many property investors take the approach that paying off the loan completely is not ideal. Instead, they simply reduce the loan to value ratio as far as they can and then fund their retirement living expenses by borrowing against the equity if and when they need it.

Acquiring funds this way does not attract income tax*, which is one of the main benefits of this plan. However it should be noted that every time you withdraw some of your equity, the repayment amount and interest due on your loans will rise.

As long as your properties continue to experience capital growth and the rental income keeps pace with the rises in your repayments, this plan may seem like an endless cash machine. But 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 so much that you can’t borrow any more money, or you may need to start selling off your properties in order to meet your repayment commitments – which may not be ideal.

Of course, selling off your properties to fund your retirement is also a possibility. However, you will need to take into consideration capital gains tax and carefully plan ahead to ensure you have generated sufficient potential funds to meet your needs.

Get professional advice before you start
The truth is that using property to fund your retirement is not as simple as it sounds – there are many variables involved. But one thing is for sure, if you want to use property to gain financial freedom in the future, then you need to have a plan. And the sooner you start to implement your plan, the more likely it is that you will achieve your goal of funding your retirement with property.

Before you take the plunge and start buying up investment properties, it is very important that you get some expert advice to help you formulate an investment plan that is right for you. If you want to be a successful property investor, then it pays to have a team of professionals who can advise you along the way and help you to avoid making costly errors. This team might include a financial planner, tax specialist, property manager and certainly us – a reliable team of mortgage experts.

If you’re thinking of using investment properties to build wealth and perhaps, fund an early retirement, then give us a call now. We can not only help you with the right financing, we can also refer you to some of the experts you will need to create your team of professionals and formulate a firm plan for success. So please give us a call today!

*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.

Element Finance, Mortgage Broker for Fremantle, Joondalup & Perth
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