What’s the best retirement plan option? Most pundits will recommend investment properties inter alia, and you have thought about it many times, but did not follow through? Then read on. Usually, these ‘investment gurus’ are in most cases friends and family who hear many ‘got rich’ stories from their mates and of course from social media like Facebook, YouTube clips and articles in your local newspaper among others.
Most conclude with “you must buy an investment property now! or lose out”. They usually talk of the perceived retirement benefit if property appreciates in value in the future. Before you jump on this bandwagon, let me try to explain how investment properties can benefit you in the short term as well and strategically map out a solid retirement plan for you.
Let’s use an example of an average Australian drawing a salary of $ 60,000 p.a. This salary based on current tax rates will attract a tax just over $ 11,000, sans any tax deductible expenses. We also need to assume he / she is privy to or have access to around $ 50,000 in cash through savings or through equity from the principle place of residence etc. In year one this person invests in a property valued at say $ 300,000. The borrowings for this investment property will be $250,000.
Based on this, the new tax payable calculation should be,
| Annual salary | $ 60,000 |
| Plus rental income from property (est.) | $ 14,300 |
| Less borrowing cost for $ 250,000 (est @ 4% p.a.) | $ 10,000 |
| Less Depreciation and other deductibles on the property (etc.) | $ 6,500 |
| New taxable income | $ 57,800 |
The new tax bill for this individual is ~ $ 10,000 p.a which is close to $ 1,000 tax savings p.a. With around $ 1,000 p.a and with the expected property growth say 100% over the next 20 to 25 years* the tax payer can enjoy a $300,000 retirement fund along with his super.
Should the retiree be happy? Of course not, how long can one survive with $ 300,000 and what’s left of your super fund considering today’s cost of living?, and its anyone’s guess what consumer prices will be in the future.
This is why the smart investor continues to reinvest in properties every three to four years without any additional capital than what he/she spent on the first investment. Are your still reading?, then let me explain.
Based on the property market performance in the past (not the recent past, with COVID 19 and its impact), lets assume the initial market price on the investment property grew by 10% p.a. By the fourth year the property is now over $ 400,000, giving this individual an additional equity of over $ 100,000. Most banks will be happy to re finance this borrower, and he/she can use this additional equity as an advance or key money for the next property, and you guessed it, his/her annual tax bill further reduces p.a.
Using this method the induvial should have a portfolio of investment properties (say around 7 to 8 in the next 30 years) at the time of retirement with the added bonus of minimal tax payouts to the Tax Office. I don’t think you need any more explanation on this.
A mate once told me that an investment property is paid for by three parties,
- The Tennent
- The Tax Office
- You
The amount you have to cough up can be as low as $50 per week for an investment property. That’s $ 52,000 for 20 years, assuming all other factors like borrowing rates, tenant income etc. remain constant at today’s prices. Now this is an affordable price to pay for a gain of over $ 300,000 for one property.
Please call Yohan on 0451 011 399 or Dirk 0449 917 046 our general number 03 8512 0338/7
**This is the authors opinion, actual results may vary