Property investment, when approached with effective planning and expert guidance, can serve as a powerful tool to enhance your retirement income, and supplement your superannuation and pensions. In this article, we provide a comprehensive guide to help you estimate the additional returns property investment can offer, ensuring a secure financial future.
Living Off Rent:
While rental income is a significant aspect of property investment, it is crucial to consider how equity and capital growth can be leveraged to amplify your portfolio and retirement income. On average, gross rental income for properties in Australian capital cities is around 4% of their value. However, after accounting for ongoing expenses like agent management fees and maintenance, the net return tends to be closer to 2.6%. For instance, a $500,000 property would yield approximately $250 per week in net rental income.
To sustain a retirement income of $25,000 per year, it would require roughly $1 million of unencumbered property. Consequently, if you intend to rely solely on rental income, a property portfolio of around $2 million would generate an annual income of $50,000. However, considering the typical appreciation of property values and rents exceeding inflation rates, the potential average retirement income could amount to approximately $60,000 per year.
It is important to note that certain areas offer higher yields of up to 6% gross or 4.6% net (or higher with corporate letting). Therefore, careful selection of investment locations, with the assistance of an advisor, becomes vital, alongside the development of a strategic property investment plan.
Living Off Rent, Equity, and Capital Growth:
To optimise retirement income, it is prudent to explore how equity and capital growth can work in your favor, reducing the number of properties required or increasing returns compared to rental income alone. Assuming a conservative annual growth rate of 6% (lower than the historical average of 9% over sixty years), property values tend to double approximately every 12 years.
Retirement Option 1:
One option involves retaining all your properties indefinitely, allowing you to live off the average rental income of $60,000 per year. In this scenario, properties would be passed on as inheritance to family members or charities.
Retirement Option 2:
Another approach involves keeping your primary residence as an inheritance while gradually selling investment properties. For example, you could sell one property at retirement (around age 65) and subsequently sell another every ten years. Assuming a lifespan until age 105, the net sale proceeds, when invested in a managed or superannuation fund averaging a 6% return, could provide an annual income of approximately $110,000 until age 105.
Additional Considerations:
It is worth noting that diversifying your retirement income beyond property investments, such as utilising other investments and maximising your superannuation fund, can further enhance your financial stability. For instance, if your super fund averages a 6% return and you simultaneously draw down on the capital, like the property selling strategy described above, a $1 million investment growing at 6% over 40 years could increase your retirement income by approximately $65,000 per year.
By employing a strategic and informed approach to property investment, you can effectively boost your retirement income and secure a prosperous future. Careful consideration of rental income, equity, and capital growth, coupled with expert advice, will enable you to optimise your property portfolio’s potential and create a robust financial foundation for retirement. Remember, the assistance of a knowledgeable property investment advisor is invaluable throughout the process.