Owning an investment property in Australia is one of the most popular wealth creation strategies and a very common aim for our clients. For those with a long-term investment horizon and stable cashflow, an investment property is an excellent option.

There are a number of reasons why investment properties are such great wealth creation assets. They are easily geared at low interest rates. They have low price volatility and most clients understand and are comfortable with property price cycle, therefore, very few people panic sell an investment property. Investment properties are tax effective due to negative gearing and the capital gains discount.  Most importantly, properties have a long history of strong capital growth.

Large numbers of Australians have built substantial wealth through property and owning an investment property has long been regarded as a sign of success.

Once we reach retirement and need our assets to provide income, investment properties are no longer as attractive.

The benefits of the investment property are less important in retirement. Capital growth is no longer the primary goal; we are more interested in providing income. The old cliché is that capital growth doesn’t pay for the groceries. The tax advantages are lower as most retirees pay very little, if any, tax and of course, gearing is unlikely to be beneficial in retirement.

There are a few other issues with using an investment property as a major income source in retirement. They are very illiquid; you can’t easily access part of the asset to meet unexpected lump sum expenses that occur in retirement. Investment properties also have an unreliable income source; if your house in not tenanted for any period of time, you receive no income.  The same applies if the tenant fails to pay rent for whatever reason. When you are building wealth and focussed on capital growth these issues are insignificant, in retirement these are substantial problems.

Another drawback is the unpredictable expenses associated with maintaining an investment property. You never know when you may have to replace the hot water system or alike. Whilst you’re working this is not a problem, but with no other income this can negatively impact lifestyle.

Clients are often very reluctant to sell investment properties as they approach retirement, mostly because it has been a successful investment and they believe it will continue to grow in value. The property is actually very likely to continue to grow in value, but the aim of the game isn’t to die with the highest wealth.  By structuring your assets with a focus on providing accessible funds and a regular income, it is likely you are going to have a much higher standard of living in retirement. That was the aim of buying the investment property in the first place.