Buy-to-let investments will keep pace with inflation
South Africa’s volatile and unpredictable economy has seen more investors putting their money into more flexible investments to fund their retirement, and buy-to-let property is one of the most popular.
The five top reasons, according to Bill Rawson, chairman of the Rawson Property Group, are:
It is inflation-proof.
It is self-funding.
It is an accessible nest egg.
It has tax benefits.
It leaves a legacy.
“There are a lot of general benefits to investing in property, but when it comes to retirement, the most important factor is its ability to generate rental income that keeps pace with inflation,” Rawson says.
It allows investors to plan a rental portfolio that provides sufficient income to support them at today’s rates, and know it will continue to support them at the same level in 10, 15 or 50 years’ time.
“It takes the guesswork out of things, 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 higher – than inflation, and support the same lifestyle down the line as it does today.”
While it may take a few years for a buy-to-let property to become profitable, Rawson says between bank financing and rental returns, it is “entirely possible” to fund this investment predominantly with someone else’s cash.
“You’re unlikely to be able to convince someone else to pay your retirement annuity or buy your shares, but you can get a bond for a property, and the rental income can help pay off the bond. That means you can literally finance a large portion of your retirement using rental capital – an option that’s not available with any other investment type.”
Apart from rental income, properties also appreciate when they are properly looked after, so this capital growth can create a useful emergency nest egg.
While most retirement annuities have limits on how much capital one 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 Rawson says it is 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 comforting.”
Investing in buy-to-let property also has tax benefits.
Rawson says: “The interest on a mortgage is tax deductible, and that amount can be quite significant early on. This benefit decreases 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 from a property portfolio without selling the properties themselves, 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, and allows you to ensure your loved ones are taken care of long after you’re gone. It does, however, require planning to minimise taxes and duties on the closing of your estate,” Rawson says.
He 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.”