Property Investment for Retirement Income

Many New Zealanders plan to use rental property for retirement income, but relying on property investment requires understanding both the benefits and the challenges. The basic idea is to own one or more rental properties that generate income in retirement, with the rent providing regular cash flow to supplement NZ Super.

The Retirement Property Strategy

Investors approach property in retirement in different ways. Some plan to keep their properties and live off the rental income indefinitely. Others intend to sell properties gradually to fund retirement spending as capital needs arise. Many also view property as inheritance for their children, maintaining ownership to pass wealth to the next generation.

Rental Yield Reality

Gross rental yield is calculated as annual rent divided by property value. In New Zealand, gross yields typically run 3 to 5 percent. A $700,000 property yielding 4 percent generates $28,000 in gross rent annually, which works out to about $540 per week. However, gross yield is not what you actually receive in your pocket.

Net Income After Expenses

Rental income comes with substantial costs that significantly reduce your actual return. Property management fees run 7 to 10 percent of rent, which on a $28,000 rental is $1,960 to $2,800 annually. Insurance costs $1,500 to $3,000 per year, while rates add another $2,000 to $4,000. Maintenance averages $3,000 to $5,000 per year but can be more for older properties. Body corporate fees add $3,000 to $6,000 if applicable, and you should allow 3 to 5 percent of rent for vacancy periods, which is $840 to $1,400.

On $28,000 gross rent, expenses might total $12,000 to $18,000, leaving net income of just $10,000 to $16,000. That works out to $200 to $300 per week. It is helpful additional income but not transformational on its own.

Mortgage-Free Is Essential

If you still have a mortgage on investment property at retirement, the interest payments consume most or all of your rental income. A $400,000 mortgage at 6 percent costs $24,000 per year in interest, which would wipe out the gross rent entirely on a typical property. The rental property strategy for retirement only works if you own the property outright by the time you stop working.

Tax On Rental Income

Rental income is taxable at your marginal rate. With NZ Super already providing income, additional rental income may be taxed at 30 or 33 percent. On $15,000 net rental income, you might pay $4,500 to $5,000 in tax, leaving just $10,000 to $10,500 after tax. Factor this into your calculations when assessing whether property provides meaningful retirement income.

Ongoing Responsibilities

Owning rental property in retirement means continued landlord duties. You will need to respond to maintenance requests, manage tenants or oversee property managers, keep up with Healthy Homes and other regulations, handle disputes and arrears when they occur, and make ongoing decisions about improvements and repairs. This can be stressful, and some retirees find property management becomes a burden rather than the passive income they expected.

The Selling Option

Some investors plan to sell properties gradually to fund retirement, turning capital appreciation into cash. This approach has advantages: it provides lump sums for major expenses, eliminates landlord responsibilities, and may be more tax-efficient than ongoing rental income.

However, there are disadvantages to consider. Selling means losing your ongoing income stream, you face market timing risk if prices drop when you need to sell, sales within 2 years may trigger bright-line tax (from July 2024), and selling reduces the inheritance available for your children.

Diversification Concerns

Having most of your retirement savings in property creates several risks. You face concentration risk by having most of your wealth in one asset class. Property is illiquid, meaning you cannot sell part of a house when you need some cash. You are exposed to local market risk where one area's economic fortunes directly affect your retirement security. And you face ongoing maintenance and regulatory risk that requires continued management attention.

Financial advisers generally recommend diversification. Property can be part of your retirement plan, but perhaps not all of it. Having a mix of assets provides more flexibility and security.

Property vs Other Investments

It is worth comparing property to alternative investments. KiwiSaver and managed funds are liquid so you can withdraw as needed, they are professionally managed, diversified across many investments, require lower effort, and have lower transaction costs.

Term deposits offer very low risk and are liquid at maturity, though they currently provide lower returns than property and offer no capital growth potential.

Property offers a tangible asset you can see and touch, potential capital growth over time, and the ability to use leverage, though leverage is risky in retirement. On the downside, property requires higher effort and costs, and is illiquid when you need to access your capital.

Making Property Work For Retirement

If property is part of your retirement plan, own it mortgage-free by retirement so the income actually reaches your pocket. Budget realistically for expenses and vacancy, factoring in realistic costs rather than optimistic scenarios. Consider your time and stress tolerance honestly, and have other savings too for diversification. Be willing to consider selling if management becomes burdensome, and keep properties well maintained to preserve both value and rentability.

When To Reconsider

Property investment for retirement may not suit you if you cannot pay off the mortgage before retiring, if managing property causes you stress, if your property is in a weak rental market, if you have no other savings to provide diversification, or if your health makes hands-on management difficult.

There is no shame in selling investment property and investing the proceeds differently. Flexibility is valuable in retirement, and what worked during your working years may not be the right approach once you have stopped earning.

Getting Advice

Speak to a financial adviser about how property fits your overall retirement plan. They can help you model different scenarios, consider tax implications, balance property with other investments, and plan for changing circumstances. Your retirement plan should work for you, not tie you to responsibilities you no longer want.