Given the uncertainty and volatility that has characterised investment markets in recent years, many people are looking for ways of supplementing their retirement savings, and property is one of them.
IOL Business recently ran a story of a woman in her 50s who had no savings or retirement plan, so she decided her best option was to buy a home to at least have a roof over her head when the time came to retire. She asked whether it was a good move as a retirement plan.
Others, who have made some retirement plans, also asked whether owning physical property was a good idea.
“Unfortunately, there’s no easy answer to this question,” said Samukelo Zwane, head of product development at FNB Wealth and investments.
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“The decision whether or not to invest in physical property for retirement depends on the unique circumstances of each individual, as well as their income needs once they retire.”
Diversification across different asset classes is always a prudent approach to retirement planning, he said, “and physical property is undoubtedly a viable asset class for many people to include in their retirement strategy”.
However, caution is required “as well as a clear understanding of what retirement means for your income”, he said.
“For the vast majority of people, retirement coincides with a significant drop, or complete loss, of a steady income stream, such as a salary, and it’s important to clearly understand that how each investment you make will meet your unique income needs after you stop working.”
While it may sound logical enough, “many people don’t fully understand the implications of not earning an income anymore, and having an essentially ‘finite’ amount of financial resources from which to draw an income for the rest of their life”.
“Understanding this retirement reality for yourself is the first step in deciding whether a property investment should form part of your retirement plan, and if so, what type of property investment is best suited to the income needs of future you,” he said.
Zwane said property investment is not without its own share of risks and that these differ depending on the type of property investment you make.
“Buying a physical property – like a residence or a commercial building - can be a good investment if market prices continue to rise, and if that’s the case, the property could be sold for a handsome profit down the line or rented out to achieve a steady rental income in retirement.”
However, he said there’s always a chance that property markets don’t rise like you had hoped they would or that prices are depressed just when you want to sell.
Added to that, he said, are the often significant costs involved in buying and owning a property, including transfer duties, rates, levies and ongoing maintenance; not to mention that the sale of an investment property triggers Capital Gains Tax.
“All these considerations, and more, apply to a property you buy to rent out, like the possibility that your tenant may default or that you are unable to rent it out for a prolonged period, which would mean you don’t earn any income from it for that time period.
“Or, if it’s a commercial property, even a decline in the industry in which your tenant operates could have a negative knock-on effect for your rent payments. All of which could spell disaster if that rent is a large part of your retirement income.”
Despite these risks however, Zwane is positive about the potential for physical property to add value in a retirement investment, provided it isn’t the only income generator but forms part of a wider selection of retirement assets, including a pension or retirement annuity.
He also advises those who don’t want to have to deal with the time and financial costs of being a landlord to consider other forms of property investment, like listed properties or fractional investments.
“These forms of investment allow you to benefit from the investment profile of a portfolio of properties without ever having to physically own any of them.
“And because many pay regular dividends, a large enough investment could generate an income over time. However, that may fluctuate, depending on the performance of the properties and the markets sentiment.”
Zwane said retirement investment “is just like any other investment”.
That means the best approach is to diversify your assets. “Including property as one of those asset classes can be a very savvy approach to take, provided you know the risks, plan for your unique income requirements once you stop working, and never put all your retirement eggs into one property basket.”