Investment properties: Quality vs quantity

Much like there are various theories about how much money you need in superannuation before you retire, there are varying opinions on how many investment properties you need to fund a generous retirement.

The fact of the matter is there is no right answer when it comes to the number of investment properties you need before retiring – instead it comes down to the value of your assets.

“Indeed, the number of properties is not really the most relevant measure. In fact, it’s meaningless,” Stuart Wemyss wrote for ProSolution. “More important is the quality of the assets that you own and the amount of equity you have in them. I would prefer to own only one sensational investment property compared to three average ones.”

But the question that plagues many Aussies with retirement in their sights is whether living off the rental returns from an investment property is a sound retirement strategy. It’s a question that Steve Mickenbecker, a finance expert at Canstar has heard many times before.

“People look at property as a good investment because it has been in Australia for as long as I can remember,” Mickenbecker said. “But you have to look at why it’s a good investment. And it’s not because residential property as a category outperforms shares and other investments, it’s because you’re gearing into it. You can gear into property, but it’s far less acceptable for you to gear into a share portfolio.”

But with gearing comes extra risk, as Mickenbecker points out.

Mickenbecker said that while it’s safe to assume that property is a good investment, it’s important to consider the uncertainties of property ownership.

“Will I get the price appreciation that people would have historically expected on this property or this style of property? What happens if interest rates rise? Can I afford the higher repayments? What if I lose my job and can’t afford the repayments? What if there are rental vacancies and rents fall and you don’t get that long-term 4% or you have long periods where you don’t get rent. What if there are significant repairs? These are things people have to be aware of when they go into investment,” he said.

As for whether it’s too late to buy an investment property in the lead up to retirement, Mickenbecker insists that the purpose of an investment is to add value after retirement.

“Just because you retire at 65, doesn’t mean the property investment has to stop,” he said. “The hope that people have when they buy a property is that it will appreciate in value and that’s certainly the history of property in Australia. It’s possible that the property could have at least doubled in value [if you were to purchase it 10-15 years prior].”

Meanwhile, Wemyss stresses the importance of having a debt exit strategy in place to repay the debt when you retire.

“I typically like my clients to have little to no debt when they enter retirement because, at this stage of life, they will be very sensitive to interest rate changes (because their only income source is investment income),” he wrote. “Therefore, if an investment strategy involves borrowing a lot of money to invest, you must also develop a plan for how you will reduce debt before retirement. This might be achieved through gradual debt repayment funded from your surplus cash flow, the sale of investments on or after retirement (property or shares) or drawing a lump sum from super – or a combination of these things. The point is, you must have a clear debt repayment strategy.”