Investing in retirement can be confusing.
Unlike other times in your life, it can be hard to come back from a poor investment decision.
Unless you have an alternative source of income, you may have lost the money forever.
So it’s important to get it right. One common choice for older Australians is housing.
We have seen housing prices skyrocket over past decades and it’s hard not to want to say, “I want a piece of that”.
There’s an old saying, ‘they aren’t making any more land’, and you would have to be blind not to see how the Australian economy relies heavily on housing values to tick the economy over.
However, it’s not as simple as buy house and make money, there are some important considerations you should consider before taking the plunge.
Here are the pros and cons.
Pros
It’s easy. Investing in housing is relatively simple. You like a property and, if you can afford it, you buy it.
While you should always do your homework beforehand, it’s not like analysing complex investment products or choosing the right shares. And because property is booming in Australia, there are a lot of support services to help you along the way including lending advice, real estate agents and even buyers’ advocates.
Income. The rental shortage means you are almost certain of a reliable income.
Tax. Fortunately, Australia has negative gearing, so you can claim the interest and costs of the property on your tax.
Property values. I’m reminded of a comment made by an economist who said that if you have a decent-sized house in a metropolitan area, your home probably made more money than you did last year. Housing prices have not had a significant fall in the past five decades and they are probably not going to anytime soon.
Security. Many investments are represented by bits of paper or blips on the screen. A house is one of the few solid investments you can point to and say, “I own that”.
Cons
Debt. If you are not buying the property outright, will you have enough income to cover the repayments? In many cases, lenders will be hesitant to lend you money at an older age because of this issue.
You may think that lenders will consider the rent income, but this isn’t always so. They will often want to see a lot of assets in your name before lending you any money to buy property.
Costs. Property is not set and forget. Property needs maintenance, upgrading and management to keep the asset at its optimum level. There are also taxes, rates and utilities depending on how the property is structured.
And if you are renting, then there are the expenses such as body corporate fees, insurance and real estate fees if you are handing it to a third-person to collect rent. If you have a long-term tenant, good for you, but tenants also come and go, so that’s another expense for advertising and vetting.
Even just buying a property is costly. There are legal fees, stamp duty and pest and building reports to be paid for, none of them cheap.
Interest rates. You’d have to be living under a rock not to notice the impact rising interest rates have on property. It’s a cost you have almost no control over or can dictate if your investment fails or succeeds depending on your level of borrowing.
Selling it. Housing is considered a solid asset, but that’s not always a good thing. For example, if you suddenly need $20,000 for whatever reason, you can’t cut off a bedroom and sell it to access your equity. You either need to take out a loan against the property or increase an existing loan, and all that takes time and hassle.
Before you start
It’s worthwhile sitting down and doing the sums before you take the plunge. Check out similar properties in the area where you are thinking of buying, and take into account the rent you can expect and the costs involved.
Also consider the age and type of property. They may be cheaper if they are a bit older, but maintenance costs will be higher. A house may hold more value than a flat, but once again maintenance costs will be an issue.
Try to find the balance between what you can afford, what you would like to buy and what the expected costs will be.
Have you considered investing in housing? Why not share your tips in the comments section below?
Also read: Intergenerational fears for young homebuyers
