Many people are looking at property as a means of supplementing their income in retirement. For most, the plan primarily involves buying a property and relying on the capital growth to create a lump sum upon sale later in life. While this strategy could certainly work if you buy in a location that sees price increases over the next few years, it pays to consider the role of income from a property more than the capital growth.
By looking at the rental yield of a property, an investor can see how likely it is to generate a profit above and beyond the cost of the mortgage and other day-to-day running costs. Properties where the rental income is substantially above the costs are likely to produce a cash profit in the short-term from the rental income, as well as the property potentially going up in value and creating a capital gain.
High yield properties can certainly be safer investments for retirement planning than simpler growth property, where price inflation is being relied upon to generate a capital lump sum.
A high-income property will produce a profit after paying the cost of the interest on any mortgage. This profit can then be used to pay management charges and other running costs, and after tax it will still provide a net positive cash flow that the investor can take as income or use to pay down the mortgage.
An investor who uses the net profit as an annual repayment against the mortgage outstanding is taking a deferred income view of their property investment. This is ideal for retirement planning as, for the duration of the investment while there is a mortgage in place, the investor receives no income but the rent pays all costs and reduces the mortgage. Once the mortgage is paid off the investor takes all of the net rent as income.
High income properties
The sort of properties giving a relatively high income can include commercial property like smaller offices or industrial units, new-build student apartments and some overseas holiday property if well-managed and in a country with low interest rates.
Commercial property has been a superb investment over the last 10 years, particularly within a pension. Commercial buildings would normally be out of reach for many people with potentially as little as 33 per cent loan-to-value permitted within a pension. But with commercial property syndicates offering a share of both the costs and the risks, more investors can benefit from high yields of 7-9 per cent that are still available today with a minimum investment of just £20,000. What is more, syndicate structured lending is carried out independently of the pensions and so normal property gearing levels of 70 per cent or more would be possible.
A £23,000 investment into a commercial syndicate through a Self Invested Personal Pension (SIPP) could gross up to £38,000 for an upper rate taxpayer once the government has refunded the income tax paid. This investment into a syndicate would purchase an interest in around £100,000 of property. After 12 years, once the mortgage is repaid, this initial investment could generate £8,000-£8,500 p/a in retirement, index linked in line with rent inflation, an enormous return on investment.
Creating opportunities
As part of its drive to create more opportunities for investors looking to boost their retirement income, Assetz has launched a new software tool, designed in-house, that takes these principles several steps further. The system determines roughly when the individual investor should be able to retire by analysing any existing properties in their portfolio and determining future investments that will provide an income for life on retirement. The system reduces portfolio risk, even if severe problems occur in the housing market such as price falls and interest rate hikes. The investment plan should still deliver a successful retirement outcome, albeit a little later than originally planned.
With a single lump sum of between £50,000 and £100,000, the Assetz system can make a significant difference to the retirement income of someone in say 10-15 years time, generating in the region of £10,000-£30,000 more income per year in retirement, index linked with rent inflation. There is much talk of equity release being used in retirement to generate additional investment income. Releasing a lump sum sooner is preferable, especially if an investor is releasing equity from their own home, as a long-term view can reduce the risks of equity release, and also increase the returns.
There are many more ways of using property to boost income in retirement, whether immediately or in many years to come, but Assetz firmly believes that property should not be a replacement for traditional pension savings but instead should exist alongside them to provide additional income in retirement.
Stuart Law is managing director of Assetz
