Using property to fund retirement sounds simple until you try it. Across Australia there are property investors who, on paper, have done very well. They own several properties and hold a great deal of equity. Yet as retirement comes closer, the wealth they built does not turn into the income they need.
I call this the asset rich, cash poor position. It is rarely caused by a lack of assets. It comes from a gap between the assets someone owns and the income their retirement needs.
The strategy that built the wealth
For decades the common property strategy in this country has been simple: invest, hold, and let time do the work. For those who held on through the cycles it has served them well, and their equity shows it. But that strategy was built for accumulation. The debt was set up for growth, and some properties were negatively geared on purpose. None of it was designed to pay the bills once the salary stops.
Using property to fund retirement: equity is not income
Equity is what a property is worth, less the debt against it. A property worth one million dollars with four hundred thousand owing holds six hundred thousand of equity. That looks impressive on a statement. Equity does not pay the electricity bill on its own. It can be drawn on, by borrowing against it or through the Home Equity Access Scheme, and that adds debt and interest, so it is worked through with your accountant and your lender, or Services Australia for the scheme.
Take a couple in their early sixties with four investment properties and a lot of equity. While they both worked, their wages carried the loans. The day they stop, the rents have to carry the loans instead, and there is very little left to live on. They are not short of wealth. They are short of income, and the gap appears the week the last pay cheque arrives.
The two choices people think they have
The two choices usually put to me are to sell or to keep holding. Selling may solve the income problem but shrinks a capital base that took decades to build. Holding keeps the portfolio but leaves the cash flow where it is. Neither is the whole menu.
The question that opens it up
Could the assets be arranged to produce more income without shrinking the capital base? That leads to a closer look at the kind of assets held. Some property suits growth; other property suits income. The mix someone holds has a lot to do with the cash flow it produces, and the mix can change. Owning the windmills was always part of the goal: they can grow in value while they turn. In retirement, the question is how to draw more of their energy without giving the windmills away.
- How much income will your retirement need, after tax, at today’s prices?
- Which of your assets produce income now, and how much?
- Is your debt set up for accumulation, or for income?
- What happens to your income if you hold everything, sell one, or sell two?
None of these has a general answer. Each answer comes from your own documents and goals, with the routes laid side by side. The point of building a portfolio was always the life it would pay for.
If your equity is strong and your income isn’t, start there. Book a first conversation. It costs nothing, and you will be told plainly if there is no value to add.
Nicholas Lockhart