Why Investing in Property for Retirement is Your Best Bet for a Golden Future
Why Investing in Property for Retirement is Your Best Bet for a Golden Future
People across the developed world are living for much longer than their predecessors. While some are willing and able to continue working after their official retirement, many retirees look forward to living out their golden years in stress-free bliss near a beach or in the countryside.
Unfortunately, that will require a more consistent income for longer. The reality is that each of us will need at least £600,000 saved in order to live what most would regard as a comfortable retirement – and not enough people are saving adequately. In fact, FCA research shows that 15 million people in the UK aren’t saving for their retirement at all.
Unfortunately, relying solely on a state pension simply won’t be enough to provide a good, let alone dream, retirement. This is backed up by the Bank of England’s chief economist, Andy Haldane, who stated that when it comes to retirement planning, property is a better bet than a pension.
What’s more, traditional savings account returns are largely pitiful and can be easily cancelled out by inflation. Stock markets can deliver high returns but can also crash, resulting in too much uncertainty for retirees who need to ensure a consistent income. In addition, you have to be prepared to do the research, engage with a share dealing platform, and pay trading and platform fees. The alternative is to invest in a portfolio of funds and rely on someone else’s judgement.
Ultimately, one person’s retirement needs will look very different to another’s, based on factors such as physical ability, retirement age, number of dependents and lifestyle choices. There need to be easier, more reliable ways for people to invest for their retirement – without putting them at a greater financial risk than they are comfortable with
Is Property a Good Investment for Retirement?
Of all the asset classes, we believe in property. You can see and touch property, and use straightforward factors like its condition, use and location to determine its value. That said, you can choose between a few different approaches to investing in property for retirement. Let’s take a look at some of the most popular options.
Buy-to-let mortgages took off in 1996 and many people jumped on the bandwagon, seeing rental income as an effective way to build their nest egg. It’s still a viable option but it’s less attractive than it used to be thanks to an increasing amount of red tape and financial responsibility. Changes in taxation for example have made it harder for amateur landlords to turn a profit. Tax relief on mortgage finance costs is now restricted to the basic rate, the 10% wear and tear allowance has been scrapped, and property owners need to cough up a 3% stamp duty surcharge on each band of house price. What’s more, come 2020, investors who pay higher rate or additional rate tax will no longer be able to offset any mortgage interest against their profits.
All of that in addition to the hassle of managing tenants and maintaining properties? It’s not an ideal scenario for older people who may be fast approaching retirement.
DIY Property Projects
Buying more affordable properties for DIY development or renovation and then selling them is commonly known as ‘flipping properties’. This is another way people are investing in property for retirement but it’s risky – especially if you shoulder the majority of the financial burden. Unfortunately, things can, and do, go wrong.
The property market takes an unexpected downturn, your application for planning permission is rejected or tenants renege on their rent and/or cause damage to your property. A much more sensible approach to retirement planning is to find investment options with a healthy risk-reward ratio. Do-it-yourself projects may be high reward, but the accompanying risks could leave you out of pocket – which is a loss you can’t really afford when planning your long-term financial future.
Peer to Peer Lending
Fortunately, there are other options.
At The House Crowd, we’re seeing an industry-wide rise in the popularity of peer to peer lending secured against the underlying value of property. With high rates of interest, investors can earn 6-10% a year depending on the loan. Higher returns do come with potentially higher risks, but it’s easier to spread invested capital across a variety of peer to peer loans, and thus, spread the risk.
Investment periods are typically shorter – but there is potential for compound growth over the long-term, in other words, for your retirement nest egg. Compounding the interest you earn from short-term lending provides a more reliable means of building up your investments than any speculative capital growth you may achieve by actually buying a property (although it must be noted that once interest has been compounded it joins your original capital in being ‘at risk’, by virtue of it being reinvested) .
Of course, the earlier you begin, the greater the rate of return. This compound calculator gives you a good idea of how your investments could grow if you keep reinvesting and adding the interest you earn to your investment each time.
Thanks to secured lending and property development investment loans, ordinary investors can take advantage of profitable property investments with varying levels of risk. These investment options mean you can invest in loans made directly to a homeowner, or in the redevelopment or construction of property.
You could also invest in a peer to peer lending ISA. This is also known as an Innovative Finance ISA and enables you to diversify your investment across multiple secured peer to peer loans and earn a fixed rate of tax-free returns. The perks are simple: better and more consistent returns than buy-to-let investing with none of the hassles that usually accompany tenant management.
Investors can also consider a Small Self-Administered Scheme (SSAS) if they are a business director or a senior employee. This self-invested occupational pension scheme is an incredibly tax efficient way to save towards retirement. It gives them more control over their investment decisions and allows them to use their pension plans to invest in their businesses.
There is no minimum investment amount required but as the SSAS provider will charge a fee, investing at least £50,000 is advisable. The tax advantages are great: other than equity dividends there is no income tax – or capital gains tax. Investors can also reclaim some tax deducted at source of income. Via an SSAS, you can invest in The House Crowd’s peer to peer bridging loans, peer to peer property development loans, and Auto-Invest product.
Best Properties for Retirees
When looking to invest in property for your retirement, you need to carefully consider the type of property and its location. Rather than choosing a place that you personally would like to live in, you need to tick a different set of boxes. For example, look for properties in areas that are undergoing regeneration, are close to major cities, and have good rail and road links. Towns that fit that description are becoming increasingly viable and popular as commuter hubs, linking people quickly to cities like Manchester and Liverpool. Other factors to consider are areas with big development projects, like the North West. As towns regenerate, they offer more employment opportunities which will attract families in need of homes. These high growth areas offer investors a chance to invest in peer to peer lending to fund new property developments – and they can typically earn up to 9%+ in returns per year.
The House Crowd is Here to Help
To secure a comfortable retirement, you need to take matters into your own hands and not rely on your state pension or traditional forms of investment. Alternative approaches to investing in property for retirement present future retirees with highly profitable means to earn an income.At The House Crowd, we specialise in peer to peer lending and crowdfunded property development investment opportunities than can earn you returns of 9.2% per annum (based on the average returns on our peer to peer bridging loans between 2016 and 2018*). What’s more, there are limited barriers to entry which means you can get started straight away – at lower minimum investment thresholds.
If you’re still asking: is property a good investment for retirement? – let’s sum up:
- It’s easy and transparent
- Returns are consistent and tax-efficient
- Short term property loans give you compound growth options
- Your capital is secured against the underlying value of property or land
- Your investments can be diversified across various loans to spread risk
*Average returns by year: 2016 = 8.8% p.a., 2017 = 9.7% p.a., 2018 = 8.9% p.a. Remember, past performance is not a reliable indicator of future performance.