Planning for retirement has changed a lot over the last couple of decades.
This is according to Tony Clarke, Managing Director of the Rawson Property Group, who says shifts in the way companies typically handle pension benefits has placed the onus on the individual to lay the necessary foundations for a financially secure retirement.
“Because of this, people are branching out into alternative long-term investments, and buy-to-let property has become a popular option.”
The general benefits of a buy-to-let investment are numerous. Aside from the gearing potential, he says rental income also decreases your risk factors along with the day-to-day costs of your investment, and can become a passive income stream after your bond has been paid off.
Property is also a comparatively low-risk, high-yield investment, and is a valuable asset in situations where currency depreciation is a real concern.
Buy-to-let property can appear even more attractive to investors over 60, says Clarke.
“The idea of ongoing monthly income that increases in line with inflation for the rest of your life is very appealing, as is the capital appreciation of property and the possibility of being able to pass it on to your heirs as part of your estate.”
As with any investment, however, Clarke advises careful thought when entering the buy-to-let market, especially later in life.
“It’s a long-term investment, and can take a few years to start generating income. If you’re buying at 60, that’s probably not a problem. At 70 or 80, you may want investments with more immediate returns.”
The terms of your financing can also make a huge difference to the profitability of a buy-to-let investment, and older bond applicants often face challenges in this area.
“The cut-off age for financing varies from bank to bank and a lot depends on the applicant’s particular circumstances,” says Mike van Alphen, National Manager for Rawson Finance, the in-house bond originator for the Rawson Property Group.
“A lot of banks might only grant a bond over a five or ten year repayment term to older applicants, which can dramatically affect your ability to cover costs with rent.”
There are cases where longer terms are granted, generally where the applicant has a good, pre-existing relationship with the bank, and can clearly demonstrate sufficient ongoing income from their pension or other investments, he says.
Both Clarke and Van Alphen agree that the most important factor for retirement-aged people looking to invest in buy-to-let property is to know all the facts and figures before committing to a purchase, and to leave emotions out of the equation.
“You need to consider where you’re buying, the value of the property and its potential capital appreciation, the size and terms of your mortgage and monthly repayments, the amount of rent you can reasonably charge, and how much that rent is likely to increase over the lifetime of the investment,” says Van Alphen.
He says you also need to take things like tax into account. All these factors affect your net return, which you need to be able to estimate in order to compare it to other investment opportunities over the short and long term.
“There’s no doubt that property can be an excellent asset in your retirement portfolio, but it does get more complicated the later in life you start”, says Clarke.
“That’s not to say you should cross it off your list of investment options once you hit 65 or 70, but you do need to look closely at all the factors to make an informed decision.”