Residential real estate as investment for retirement
Personal Financial Adviser Oran Hall
QUESTION: For sometime now, I have been thinking retirement investment. Your advisory column in 'The Gleaner' of September 14 has made me knowledgeable of other options to consider. Most of my thoughts have been around property purchase, particularly residential. Would this be a good investment at age 55? If so, what is the best mortgage rate on the market I could possibly get as a second-time homeowner?
FINANCIAL ADVISER: Like ordinary stock, real estate is valuable for the appreciation and income it provides, which is generally unlike bonds which provide income except in the case of them being bought at a discount. Real estate is also a very good hedge against inflation.
Capital appreciation and rental income are very positive reasons for investing in real estate. Capital appreciation that is not converted to cash at some stage is not of meaningful value to the retiree who needs ready income to meet ongoing living expenses.
At the same time, rental income should be at a level at which it contributes meaningfully to meeting living expenses.
The first consideration relating to investing in a residential property for retirement is the cost. Although there are instances in which the deposit is five per cent, the required level is generally higher. Add to that the other costs for legal expenses and government charges.
A major consideration in making this type of investment is whether the rental income would be sufficiently high to cover the mortgage payment and leave a surplus to add meaningfully to the meeting of living expenses. This could be challenging in the earlier period, but improve later as rental rates increase, particularly if mortgage rates do not increase.
At age 55, the term of your mortgage would be relatively short which would mean that your monthly mortgage payments would be relatively high. What would be the implications of this for your ability to earn a good net income from your property?
Consider also the cost of maintaining your property and the risks associated with poor tenant selection, which could increase the cost of maintenance. You should recognise that taking on the renting of property is in effect running a small business so you should prepare for the challenges which may come with it.
Consider also that there maybe times when you may not earn income from your investment, for example, if it is untenanted for some time.
The real big plus in investing in real estate is the capital appreciation it yields, but you would want to reap the benefit of that appreciation by selling the property at some point. Therefore, you should consider the ease with which you can sell it. The location of such a property would be of critical importance.
Another factor to weigh in making your decision is the level of returns you can make from other forms of investment and you should not forget that it is important to have a diversified portfolio.
Although ordinary stock is a source of capital appreciation, our market experience locally illustrates that the market can be depressed for an extended period.
Additionally, stocks can be hard to sell sometimes. Bonds generally give a reliable stream of income, but offer no protection against inflation.
What you get from unit trusts and mutual funds is a function of the instruments in which they invest.
The major building societies are offering mortgages at 9.29 per cent. Ultimately, you have to decide if you can earn sufficient rental income to cover your monthly mortgage payments and have a reasonable surplus to add to your income stream and, will you sell at some point to get the full benefits of your investment?
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and email@example.com