Many people use property investment as a wealth creation strategy in the lead up to retirement. Here, we give answers to three commonly asked questions surrounding rental properties and retirement.
Q 1. What are the pros and cons of using property to fund my retirement?
There are benefits and drawbacks to investing in any asset class and property is no different. Here are some of the pros and cons of property investing.
- Capital growth. If you invest wisely, there is a good chance your property will increase in value over time. To achieve capital growth, do your research to find areas with high demand or suburban development, or consider renovating to add value.
- Regular income. Regular rental income has the potential to provide you with financial freedom.
- Tax deductions. There are many tax deductions associated with rental properties. Tax depreciation is the second largest tax deduction after loan interest and is a ‘non-cash’ deduction, meaning you don’t need to spend any money to claim it.
- Maintenance costs. Investment properties require upkeep, as they will experience wear and tear over time. However, you can claim tax deductions for expenses relating to repairs and maintenance as well as for the depreciation of the property.
- Liquidity. If you need fast access to a lump sum of money it could take weeks or months to get access to capital and you may even have to sell your property.
- Volatility. It is important to understand that capital growth in property investing is never guaranteed. The real estate market experiences ups and downs, just like any other investment market.
Q 2. How many rental properties will I need to retire comfortably?
You can have various sources of income in retirement, such as tax-free income from the Age Pension or an account-based pension, or taxable income from a rental property or other investments outside of superannuation.
When planning for retirement, you should work out how much income you will need to live on and then seek professional financial advice to set your investments up with this goal in mind.
The ASFA Retirement Standard is a useful guide to working out your costs in retirement. It estimates how much income is needed for either a ‘comfortable’ or ‘modest’ retirement lifestyle.
The ‘comfortable’ retirement budget accounts for daily necessities like food, home repairs and transport but also allows for leisure, travel and technology. A modest lifestyle budgets for a retirement lifestyle that is just above the Age Pension. Both budgets assume the retiree owns their primary place of residence outright.
Q 3. Will I pay tax on rental income once I’m retired?
Once you’re retired, you still must declare all income. As a retiree, you may have income from both tax-free and taxable sources. For instance, an income stream from a taxed super fund will be tax-free, while income from a rental property is taxed at the marginal tax rate.
Claiming depreciation on your investment property can help reduce taxable income. Depreciation is a non-cash deduction, meaning there is no cash outlay required to claim it.
We recommend you seek professional advice to help you work towards your financial goals.