There are three separate strategies to increase your retirement income by living off your property equity, says Richard Sheppard.
Let’s take a scenario of a couple close to retirement, who have built a portfolio of six investment properties over the last 30 years, worth $3 million in total. They have $1.2 million of debt remaining, their home is worth $1.2 million with a $200,000 mortgage. They have superannuation income of $30,000 per annum and cash of $100,000. The couple needs to decide whether to:
- Sell enough property to pay off all the debt so they can just live off the rent, then not sell any more property until they pass away, leaving the children with a large inheritance; or
- Same as option one, except plan to sell most of their investment property by the time they pass away, leaving the children with their current home as inheritance; or
- Sell less property initially, keeping some debt and more property. Then sell another property when they need additional funds to live off. Again, like option two, planning to sell most of their property by the time they pass away, leaving little inheritance for the kids.
So, which strategy will provide them more funds to live off?
Let’s look at option one. If the couple sells enough investment property to pay off all of the debt, they will need to sell five of the investment properties, which will then leave them with one $500,000 investment property. This provides net rent of around $20,000 per annum, their home loan paid off and around $200,000 in cash after selling costs of capital gains, legal fees, and real estate commissions. Adding their superannuation income of $30,000, they can live a fairly comfortable retirement, but the income is far less than before retiring.
Option two is the same as option one, however, the couple decides that as they have $200,000 cash, they could live off some of this cash as well as their rental income and superannuation for a while. After about 15 years, they could then sell the investment property, when it has increased in value to about $1.5 million, and live off the interest and proceeds.
Option three means the couple decide initially to only sell one investment property on retirement, keeping the remaining debt, and living off the proceeds until they need to sell another property. This way they keep a bigger portfolio of property for longer which is extremely likely to achieve higher growth. Assuming that their property grows by at least three per cent per annum, this strategy will provide far more funds than the previous two options as it creates more equity to live off.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.