When you’re ready to hang up your work boots, a rental property can be a useful source of regular income.
Retirement used to be such a simple concept. Clock off from work, grab the gold watch on the way out, and register for the age pension as you head to the bowling club or fishing wharf.
These days things are more complex. We are living longer and have higher expectations for retirement. We’re increasingly being encouraged to fund our own retirement, and while superannuation is specifically designed for this purpose, it’s not the only investment that is well-suited for a retirement nest egg.
A REST Industry Super fund report shows that about 20 per cent of Australians expect they’ll retire with a mortgage, with almost 50% anticipating they’ll have some form of debt.
It seems some planning could be beneficial to the 20 per cent so they are mortgage free in retirement and have other sources of income as well.
Buying a rental property or two would help with both of these problems. It can help pay off your current mortgage faster and it provides an income source in retirement.
Obviously the earlier you start the better, it takes about 10 – 12 years for a property to double in value. But it is simple enough to achieve a portfolio of 3 – 4 properties in a 10 – 15 year period.
Here are some options you may consider at the end of your investment period.
1. Become mortgage free
You may decide to pay off your own home first and start investing in property. This is the go-to strategy for those who have a very low tolerance for risk.
When you retire, you may decide to sell your own home – which is not subject to capital gains tax – and move into a smaller home. You can then use your full tax-free profits to pay off much of the remaining debt on your investment properties and then live off the income stream provided by the investment properties.
3. Sell and celebrate
The more standard approach in retirement is to sell one or two investment properties to clear your remaining debts, and/or use this lump sum as a source of income. The only issue with this strategy is that capital gains tax is payable, so some tax planning and advice is important.
Having rental properties is not a “nice idea”, not “good” for others who can do it and not “too hard”, it’s a necessity. If you want to retire comfortably you are going to need to stretch yourself at some point earlier in your life and make the effort.
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