Retirement Life
19 September 2022
Martin Hawes - Why not property?
In the past few decades, many people who have done well out of residential rental property. As interest rates have fallen and the New Zealand housing shortage has become more acute, values have risen – for all intents and purposes, housing has looked like a one-way bet.
And now, some of these property investors are eyeing retirement. With the ownership of even one rental property, in most areas, they have a tidy nest egg.
The question now arises: what do they do with this property as they go into retirement? Do they sell the property and invest elsewhere, or, as some plan to do, should they keep their property and live on the rent?
I am firmly on the side of the first option: sell and invest elsewhere. This is because the thing that made you money may not be the thing that will keep the money safe for you. It may be that you have done very well by concentrating your money to just one asset class (in this case, residential property) but to trust that your luck will continue with property maintaining its outperformance is, indeed, a bet for your happiness in retirement – which makes for very high stakes.
Previously I have written about the need to be well diversified in retirement. I will not labour the point and those who would like to refresh my thinking should click HERE, where they will see that diversification in retirement is essential.
Project your fortnightly, tax-paid income.
The case against owning rental property as a strategy for retirement income can be boiled down to five main points:
Housing has always been a public policy (political) issue and always will be.
Successive governments have tried to put a lid on property prices and rents. However, the current government does seem to be more serious about holding down values and making property better for tenants – things like the Healthy Homes Act, amendments to the Residential Tenancy Act along with taxation measures like the extension of the bright-line test and interest costs ceasing to be deductible are adding to costs and reducing prices. Government wants to hold down the price of the very things you (as a property investor) want to rise – the government wants rents and house values to stay steady, you want them to rise. We cannot be sure how that will play out, but we do know that betting against the government is risky.
Residential rentals need very good active management.
Retirees who own rental property need to put a lot of time, effort and energy into their rentals. They will also need to keep up with legislative and regulatory changes. All of this may feel like work – for most, that is the antithesis of a good retirement.
Residential property values are now at such a high level that yields are very low.
This is not good for retirees who are depending on the rental income to fund their lifestyles. Net rental yields are probably not much more than 2 percent after all costs (rates, insurance, maintenance, management and obsolescence) are factored in. This is a very poor deal compared to other yields on offer (e.g. the average dividend yield on the Listed Property Vehicles is current 5.9 percent). It strikes me that retirees planning on using the income from residential rentals to fund retirement are cutting themselves out of a considerable lifestyle.
Rental property is one big lumpy asset that is not only indivisible but does not have the liquidity that retirees need.
Most retirees need to draw on capital as well as investment returns, and that is hard (near impossible) when all your money is in a large, illiquid asset. This also means that retirees are not diversified – everything is hanging on the performance of just one investment.
There is no international exposure.
If you are invested entirely in New Zealand assets you are very exposed to something bad happening, whether that is a major downturn in the New Zealand economy, some other kind of shock (earthquake, biosecurity breach etc.) or a major fall in the NZ Dollar (which would lead through to high inflation). Moreover, most investors want funds invested offshore so that they can enjoy the returns from some of the significant global trends that are happening in technology.
There is no single asset class that will perform well in all the different economic circumstances throughout the extended period which is retirement. It may be that you own a rental property in retirement, but only if you have enough money to own some of the other investment types as well. Property has headwinds at the moment (government intervention, rising interest rates, more new houses being built), and these should be enough to convince you that you should not be reliant on residential property’s investment performance to make retirement the time of your life.
How much should you invest to top your income up?
Written by:
Martin Hawes
Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.
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