Residential property makes a great retirement investment

One of the challenges facing South Africans is adequately preparing for retirement in a volatile and unpredictable economy.

As a result, many people are opting for more flexible investments that adapt to the ebbs and flows of the economy to future-proof their finances. One of the more popular of these options is buy-to-let property, says Bill Rawson, chairman of the Rawson Property Group.

“There are a lot of general benefits to investing in property,” says Rawson, “but when it comes to retirement, I think the most important factor is its ability to generate rental income that keeps pace with inflation.”

This, he explains, allows investors to plan a rental portfolio that provides sufficient income to support them at current levels and know that it will continue to support them at the same level in 10, 15 or 50 years’ time.

“It takes the guesswork out of things,” he says, “because you don’t need to accurately predict the exact amount of money you’ll need each month when you eventually retire. Your rental income should grow at the same rate – or more – than inflation, and support the same lifestyle down the line as it does today.”

Another advantage is that property is self-funding. While it may take a few years for a buy-to-let property to become profitable, between bank financing and rental returns it’s entirely possible to fund your investment predominantly with someone else’s cash.

“You’re very unlikely to be able to convince someone else to pay your retirement annuity or buy your shares,” says Rawson, “but you can get a bond for a property, and the rental income can help pay off that bond. That means you can finance a large portion of your retirement using rental capital – an option that’s simply not available with any other investment type.

“Apart from rental income, properties also appreciate when they’re properly looked after,” says Rawson, “and this capital growth can create a very useful emergency nest-egg.”

While most retirement annuities have limits to how much capital you can withdraw as cash on retirement, properties can be sold at any time to liquidate their full value.

The sale process may take a few months, depending on the market, but it’s still often far easier than accessing capital tied up in other long-term or regulated investments. It’s better, of course, to live off rental income if possible, but having that capital available in an emergency can be a very comforting thing.

And tax deductions are the number one selling point for retirement annuities, but property investments have tax benefits too.

“The interest on a mortgage is tax deductible,” says Rawson, “and that amount can be quite significant early on. This benefit does decrease as you pay off your bond over the years, but is a great way to reduce your tax burden while you’re still working and earning – and therefore paying a higher tax rate – and becomes less important when you retire and your tax bracket drops.”

By living off the income generated by a property portfolio without selling the properties, investors can also build a valuable legacy for their families and loved ones.

“A good property portfolio can provide financial stability for your heirs indefinitely,” says Rawson, “and allows you to ensure your loved ones are taken care of long after you’re gone. It does, however, require some forethought and planning to minimise taxes and duties on the closing of your estate. It’s a good idea to speak to a financial adviser about your options if this is something you’d like to set up.”

Rawson says property makes an excellent retirement investment, but – like any other retirement vehicle – the earlier you get started, the greater the rewards.

That said, it’s never too late to start looking into a property portfolio. Just make sure you get sound advice from an experienced real estate expert who understands your particular situation and needs.”