Property investment has become an obsession in New Zealand due to its ability to yield great returns over time. The unique feature of property investment is that the bank will lend you money to purchase the asset. If you invest in a $1 million property that increases by 5% per annum, you could be growing your wealth by $50,000 per annum. While there are costs associated with property investment, it is generally considered a great investment option.
A case study
However, property investment is not always the right solution for everyone, especially when it comes to retirement planning. Recently, a client met with James who was in his 70s and still working, along with his wife, who was in a similar situation. They had 4 investment properties worth a total of $1.42 million with $582,000 of debt, and the average yield was 5.4%.
While this may seem like a great investment, the couple’s problem was cashflow. They were receiving NZ Super of $30,000, earning a combined income of $40,000, and their rental property was costing them $10,000 per annum. The husband had recently suffered a stroke but felt he needed to continue working to maintain their lifestyle.
Their goals
When asked about their goals, the couple wanted a simple, stress-free lifestyle, an income of $80,000 per annum without working, and leaving an inheritance was not a priority. James recommended that they sell down their property portfolio and invest $800,000 into a diversified managed fund.
The solution
In a balanced portfolio, the couple could draw an income of $40,000 per annum without depleting their capital, in addition to NZ Super, which would give them $30,000 per annum. As leaving a legacy wasn’t important to them, they could draw $60,000 per annum plus NZ Super (while slowly depleting their capital), giving them a total income of $90,000 per annum.
While this approach has its benefits, such as simplicity and easy monthly income, the downside is that the value of the properties will continue to increase over time. By sacrificing getting richer on paper, the couple could enjoy their lifestyle now, which they realistically would only be able to enjoy for another ten years.
Had they decided to stick with their current property portfolio, they would have the stress of managing the properties, the negative cashflow and the need to continue to work to service the portfolio. Most importantly, they would be sacrificing their best years in retirement for being rich on paper
In conclusion, property investment is an attractive option for those with good cashflow and a long-term investment timeframe. However, it may not be the right solution for everyone, especially when it comes to retirement planning. In such cases, selling down the property portfolio and investing in a diversified managed fund could provide a simpler, stress-free lifestyle with a steady monthly income.
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