Considering I am hoping to retire in 2 years and am intending to reduce my working hours, should I sell my apartment worth $360000 and pay off my mortgage $180000 to buy a new one worth $330000 using the proceeds from the unit and some of my super (leaving me with $44000 in super which I will top up with salary sacrifice of $17750 p.a.) OR should I borrow against my unit and keep renting it out which is paying off my mortgage? With the second option I would be looking to pay off both properties when I retire and still have at least $83000 in super to draw on.
Top answer provided by:
Ash Mcauliffe
My best answer to this question is that you should find a planner and have a comprehensive retirement plan done, where the planner can use your entire current position as a starting point and provide some less generic advice.
I’m not sure that I have enough information to provide a meaningful answer because to properly answer your question, I would need to know a bit more about your entire financial situation (what your current super balance is for starters) and a better understanding of how you have arrived at the numbers above.
In advising clients in situations like this it is important to remember that the purpose of retirement planning is to provide an income, not just to accumulate a lump sum. You also need to have a clear understanding of your tolerance for uncertainty.
Assuming that your calculations are accurate, in scenario 1, you will be retiring with one apartment worth $330,000 and a super balance of about $90,000 ($44,000 plus two years of Super Guarantee and Salary Sacrifice).
Your scenario 2 calculations mean that you will be retiring with two properties totalling $690,000 and $83,000 in super which on the face of it is a better position than scenario 1.
There is a vast difference between the end result of those two scenarios after only two years so I would be interested to know how you have arrived at those numbers.
Remembering that income is the goal, not just the asset value, you need to think about how much rent a property can provide you with, compared to the amount of income you can generate with an equivalent investment portfolio. A rental property at the moment won’t pull much more than 5% at best, and with only two properties you are exposed to vacancy risk. A more diverse investment portfolio can generate more, but is also subject to more frequent market fluctuations.
Be sure to account for transactions costs such as stamp duty and real estate agent’s fees, as well as the ongoing costs of maintaining the properties.
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Comments4
"All sounds like pie in the sky type information. Without sitting down and talking with someone in more detail anything that is covered here is merely speculation and guesstimating, which doesn't do anyone any good. Mark T, if you start to see any significant rise in interest rates then you could quite easily see a substantial turn around in property prices. Given the current interest rate environment and the fact that more people than ever are borrowing (and borrowing more than ever too) it won't take much of a rise in rates for people to start to feel the pinch of increased loan repayments. Any continual upward momentum will see an increase in debt stress and ultimately surplus dwellings up for sale, which in turn will see a drop in housing prices, as it will become a buyers market. You have rose coloured glasses on if you think you can't lose with property. The share market is volatile no doubt about it but it is still one of the best long term investment vehicles around (fact not fiction). It is usually people who do not understand how it works or who cannot be disciplined who run into trouble with the market when it becomes negative or volatile. Those who stay the course and are patient end up being the winners at the end. And that is why it is 'horses for courses'. Everyone is different and will be able to handle investments differently but that does not account for naivety or single mindedness (which are commonly mistaken for stupidity, which in itself is a mistake)."
Ben 17:40 on 01 Sep 17
"Spot on Bill!"
Jarrod Owen 15:53 on 01 Sep 17
"hmm I think that diversification is key and so is structure. Do you feel comfortable about knowing that 100% of your direct property income is coming from one individual in a non tax effective structure or would you prefer to have multiple incomes coming to you in a tax effective environment from different types of assets, which also include property? Don't put all your eggs in one basket."
Bill 15:49 on 01 Sep 17
"There seem to be a few things flying around now about how housing is not a safe bet to rely on for your retirement. Surely if you have 2 houses mostly paid off when your retired you will be secure with housing prices not going anywhere for the foreseeable future? I'd feel safer in realestate than I would the sharemarket."
Mark T 15:08 on 01 Sep 17