Today is the time for my favourite section: "Your questions answered"
I received so many requests to expand on this topic, for example:
Vanessa - wrote to me: Property for leveraging.
Shares for compound interest. Still very confused what provides you a better long-term investment.
Learnings from garden – said Love your work very informative. Thank you.
Please do a video for rental income and pension. Let's say a property of $300K and income of $300 per week.
Still dreaming for a rental income.
Margaret – wrote to me: Hi Katherine, love your videos, keep watching and learning a lot.
Thank you, I'm so happy.
I cannot decide if I should keep my savings in a super fund or buy an investment property instead or maybe shares?
I tried to build a list of pros and cons for income, tax, Age Pension, and then I get overwhelmed and I just give in.
Could you help me to finally make a decision.
Well Margaret I will try to do it today.
CharisC, I hope I said the name correctly, if not, my apologies.
Katherine thank you so much as it's very helpful.
Yes, if you could also look at the topic how rental income is calculated under the Income Test.
I'm sure you've guessed the topic of today's discussion,
“Is property a good investment for my retirement?
How is an investment property treated for Age Pension calculations?
I have already done a video on similar topic, so have a look at that: "Property, Share or Super - which one is better?"
My name is Katherine Isbrandt from About Retirement, I am a CFP and you are watching About Retirement TV,
the place that is truly dedicated to help you make better financial choices
if you are preparing for retirement, or if you have already retired.
As I always say: "Retirement is a journey, not a destination, so please be well prepared for the ride".
Australians' love affair with property continues, and it is not cooling off any time soon.
And the incredible thing is that all the migrants follow this trend as well,
so no wonder the property prices around Australia keep going up and up year after year.
Our property prices got to the point that based on the data from the International Housing Affordability Survey from 2020,
Sydney was placed as a 3rd most unaffordable city in the world and Melbourne close at No. 4
only after Hong Kong at No 1 and Vancouver at No 2.
So this survey is not ranking cities based on the actual price, but based on our affordability of an average property price
and median household income per each city.
Does it mean that the rest of Australia is affordable?
Absolutely not, many other cities and districts are very close behind,
so if buying an investment property is your plan,
please do your due diligence, lots of research and speak with professionals.
So let's look at investment property from the perspective of the retirement asset,
so asset that is supposed to assist you in your retirement and provide an ongoing stable and reliable income.
Real property that has been rented out provides two main forms of financial benefit:
Rental Income and Capital Appreciation.
So, let's start with Rental Income first. While you retain ownership of the physical assets, while generating an income by renting out the property.
The properties can be rented out for residential or commercial purposes, or as well as for example a holiday home.
There could be tax benefits that come with owning a rental property,
but that depends on your financial situation and your level of taxable income.
So if we are looking at tax benefits in your retirement phase,
I wouldn't be surprised if all those tax benefits were really unutilized by you,
as most likely your retirement income is either below the taxable level, or you are on a very very low Marginal Tax Rate.
If in retirement you are paying a high tax bill,
please review your retirement planning and your tax planning as this should not be the case.
So let's look at Capital Appreciation or otherwise known as Capital Growth.
Owning a property for some time or making significant home improvements, will help your property to appreciate in value.
If that's the case, you could decide to sell the property, to access the equity for other investment ideas.
You may decide to live off the total sum,
you could reinvest into shares, for example, downsize into a smaller property, and boost your superannuation.
Just make sure that you fully understand Capital Gains Tax on sale of your real estate.
So, let's discuss now Negatives of Buying Rental Property:
1. Very high entry costs - that are often prohibitive to buy a property outright, hence, necessity to borrow funds.
However please do not do it in retirement, as any interest cost
will only deplete rental income received this is not a good retirement planning.
2. Lack of diversification - How many properties can you buy?
And please do not invest all your savings into one investment property for retirement. Even if this is what you dreamed about all your life,
you really need assets and income diversity in your retirement.
Please do not put yourself in a situation relying on one source of income only,
especially with the property when you are really relying on one physical person called a tenant -
and COVID is a perfect time to show you what happens when things go wrong, and they are completely outside of your control.
3. Lack of liquidity: you either sell the whole asset, the whole property or nothing,
you cannot sell one window just because you have an urgent bill to pay.
4. There could be a problem with the underlying property that could end up being a very, very costly exercise for you.
5. Lack of tenant or bad tenant. That could be a real nightmare.
6. High ongoing costs, that will reduce your level of retirement income. I will discuss this in more details in a minute.
7. Reliability of rental income - your rental income can become a reliable supplement to your other forms of income,
as long as you have a reliable tenant that is.
And that will depend on the economic situation in Australia.
Interest rate, location of your property, price of rent requested,
affordability of possible tenant and many many other factors.
So let's discuss those High ongoing expenses that you might have to meet with your investment property.
For example annual insurance, annual council rates or maybe you have to pay body corporate fees.
Ongoing property management fees. Income tax and accountant fees - even if you are retired
and income earned is below the taxable level, you need to do your annual tax return for rental income earned,
unlike income for example from pension funds that are exempt from tax.
Then you have to meet maintenance expenses or possible renovations.
You have to pay water rates, and cost of interest if you still have any outstanding loans.
This list is most certainly not exhaustive one, but it gives you an indication that real property
is not an easy buy and forget type of asset, which generally, we could say about superannuation,
manage funds investments or even shares if you are buy and hold investor.
So right now, let's review holding an Investment Property while you want to be receiving Age Pension.
As you obviously have seen me repeating in many videos Centrelink office runs two tests: Income Test and Assets Test.
Whichever one gives the lower Age Pension payment outcome, this is the payment you are going to receive.
And obviously the same treatment is applied to your investment property.
Income test - let's have a look at the rental income first - based on social Social Security Rules
Centrelink office will allow to deduct 1/3 of the income to cover your ongoing expenses,
therefore, if for example you receive $500 per week in rental income, Centrelink will deduct
$166 per week for your expenses and calculate the difference, therefore, $334 per week as your earned income under Income Test.
If in addition for example you have a loan of say $200,000 at 3.5% that means you still have to meet repayments
and Centrelink will allow to deduct the interest payable on money borrowed.
If we calculate, your annual interest on $200,000 loan, that is $6,000, which is $115 per week.
Therefore the previously calculated income of $334 per week will be further reduced by $115 per week
leaving $219 per week as a final income calculated under Income Test.
I think this is a pretty reasonable treatment of income, but I repeat, from the perspective of
reliability and security of your retirement income, I really do not recommend buying an investment property if you have to borrow funds.
Even if you bought a property earlier, and now you
are ready to retire, but you still have this huge outstanding loan, this is risky retirement plan,
as it is so easy for things to go wrong and if you don't have backup assets well you are toast -
I think I used that expression before maybe I’m hungry.
Asset Test - when it comes to Asset Tests- it depends.
So let's see those options:
1. If you own the property outright - the Centrelink office will calculate the actual value of your property under Asset Test.
This happens when you are first applying for Age Pension,
Centerlink will usually send out the contracted valuers who will advise of the value of your property with updates happening at Centerlink requests.
2. If you have a loan of say $200,000 against your investment property that is let's say valued at $500,000,
then Centrelink will only calculate the net value of your property which means $300,000, that is fair I reckon.
3. If however you have the same loan of $200,000 to buy the same property of $500,000
but that loan is secured by your family home, so not your investment property, but your family home
you've got it all wrong, a Centerlink office will actually assess the investment property
at its full value of $500,000.
As you know through my previous videos, family home in most cases is an exempt asset,
therefore the loan of $200,000 is not even considered
by Centrelink office in your Age Pension assessment under Asset Test.
This is an example of terrible planning and not understanding the system.
The difference of these $200,000 can mean a solid level of Age Pension as opposed to not having any Age Pension payments at all.
So my suggestion for you is, to talk to an expert either how to fix the problem
or even better speak to financial planner long before you start the whole process of buying an investment property.
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So to finish off, I think that if you are a self-funded retiree with lots of savings in your superannuation
in shares and other income deriving investments, then an investment property or two or three
are a great way to diversify and continue growing your estate.
If this is you what I would stress immediately is the fact that you need a solid Estate Planning tools,
so if you missed that essential part of your planning,
please contact me for a chat to find out what should be done to improve and secure passing your assets to your chosen beneficiaries?
If however you are either just above the cutoff point for Age Pension
or you are receiving part Age Pension, I think that rental property ownership might be a little bit too high risk
from the perspective of income, that may not necessarily be as reliable as you would like this to be
high ongoing expenses and lack of liquidity.
If Age Pension is your goal be very careful as if the property grows up in value it can prohibit your access to Age Pension altogether,
as Asset Test is not as generous as it used to be few years back.
Now let me know in the comments below if you agree with me on the property ownership in retirement?
And if not, please let me know why? I would love to know your point of view.
And now please check out this before mentioned video
“Property, Shares and Super – which one is better?”
a great compliment to today's video. The second video is all about
smart ways to be well prepared for your retirement.
I will see you in my next video bye!