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C & D

Are Direct Property Investment’s Suitable for Retirees?

Investing in property for New Zealanders has been a popular means of building wealth for retirement. Typically, property investors will try to build a portfolio of properties using borrowed funds in the expectation that they increase in value. Their thinking is that over time they can sell off a couple of properties at retirement and repay any outstanding debt.

The property investment premise is essentially one where the bulk of the investment returns will be from capital gains. Unfortunately, there can be capital losses, something that many overseas investors have suffered from in some countries.

As we head into a general election, if there is a change of government, there is the prospect of a capital gains tax. Not only will this increase compliance costs, it will impose an additional tax on any property capital gains, most likely at sale time or death.

Given that New Zealand has had tax laws that have been advantageous for property investment, this has been a good strategy, provided the properties were in areas where there have been strong capital gains. In lower price areas, most of the return will be rental income, whereas in Auckland, for example, it has been capital gains.

One major drawback has been that in most parts of the country, the return on capital has usually been low after expenses have been allowed for. Why would you want the hassle and worry of tenants when the return on current market prices can be below even that of bank deposits?

Many people live for twenty or even thirty years in retirement. Investment property held over that period of time usually requires expensive maintenance such as painting, roof repairs and replacement of floor coverings. Financial pressure can result unless provision has been made for these expenses.

Income from property is not constant, as there are often periods between tenants where there are vacancies. It is not uncommon for tenants to default on rent, and cause damage to the property. Invariably the tenant’s bond is insufficient to cover this. What about the cost of decontaminating a property that has been a P Lab, or where P and other drugs have been used? Unfortunately for landlords, this is becoming increasingly common.

One of the most compelling disadvantages of property investment in retirement is that if you want to release capital for say an expensive overseas holiday or to replace a car, there is normally the need to sell the property, as it is difficult to draw down a mortgage once retired unless a reverse mortgage facility is used.

Unless you have a desire to leave a property portfolio for the beneficiaries of your estate, it may be better to sell your properties and invest in a professionally managed diversified portfolio of liquid investment assets. These funds can be gradually spent for your enjoyment over the course of your retirement. There is nothing quite like having peace of mind, something that property investments seldom bring to the retired.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.