What’s the best strategy to invest in property for retirement?

Understanding the pros and cons of different investment strategies

To invest in property for retirement, you must:

  • Have a SMART objective
  • Understand and overcome your personal investment limitations
  • Understand and reduce investment risk

With these three prerequisites on board, you can now start to consider which property investment strategy is best to achieve your retirement lifestyle goals.

In this article, you’ll learn the pros and cons of using different strategies as you invest towards an early retirement.

Your first decision – yield or growth?

You probably want to create a steady stream of income in retirement. Your strategy will plan how you get there. While income yield will probably be your ultimate goal, don’t dismiss the power of capital growth.

By investing in properties with the potential for higher-than-average capital growth, the capital value on which you could make income will grow increase faster. And the larger the value of your property portfolio, the more exciting your income is likely to be when you start taking it. Don’t forget; you could always start by investing for capital growth, and then switch to higher rental yield properties as you near retirement.

Understanding the key differences between yield and growth will help you decide which properties will make the best investments during your investment lifetime. In short:

  • A capital growth property often suffers negative cash flow, so you’ll need to subsidise the cost of holding it.
  • An investment property that benefits from positive cash flow is less likely to gain as much in value. However, the positive cash flow also provides a cushion against higher interest rates.

Of course, the zenith of property investments would be a buy-to-let investment property that exhibits the characteristics to produce both positive cash flow (either now or in the near future) with the potential for higher-than-average capital growth.

What type of property should you buy?

The type of property that you buy depends on several factors. These include:

  • Available cash to subsidise costs (if needed)
  • Time to retirement
  • Your risk profile
  • The time you have available to commit to your investment

In the rest of this article, we’ll look at the pros and cons of three different types of investment property: off-plan; existing builds; and hotel rooms.

Off-plan property investment

Off-plan property tends to perform exceptionally well in strong markets, but also offers advantages in weaker markets.

Perhaps two of the biggest advantages are that you don’t have to pay for them upfront, and you often receive a sizeable discount from their market value. This means you keep hold of your cash longer, and have an inbuilt profit. The earlier you buy, the better the discount tends to be.

In addition to this, your purchase price is agreed based on the value when you agree the purchase, not the value upon completion. So, if you buy an off-plan property today and it completes in two years, you are buying at today’s valuation and not what the value might be when the property is completed and becomes yours.

The opportunity for capital growth is substantial, while the discount provides a handy cushion should the market perform worse than expected. This is why most off-plan property investors don’t care about recessions.

Many new developments are being created on land that has been earmarked for regeneration. Often this is near schools, shops, transport, and employment opportunities. These locational advantages should help the off-plan property to be in demand with both homeowners and renters in the future.

Existing property

Existing property can be very profitable, but also has its problems. It can be very costly to refurbish an existing home to the standards needed to compete with modern, new build homes. While new build homes are more expensive, there could be 35,000 reasons to laugh at the scary new build premium.

Existing properties tend to be located away from the best of the property fundamentals that drive demand, so rental income may be lower for this reason, too.

If you invest in a quality existing property that benefits from strong property fundamentals, you could be onto a winner. However, be prepared for a lot of hard work when upgrading, and the possibility of unexpected and unwanted maintenance bills. You won’t benefit from the NHBC warranty.

In short, to make the capital gain and rental yield you expect form an existing property, be extra vigilant when buying. Have a complete survey, including structural. Take extra care to map out the immediate refurbishment and upgrading needs and costs. Only if you’re really satisfied should you proceed. Even then, you’ll need to hold a larger reserve fund in case things go wrong – property malfunctions tend to be more common and more expensive.

Hotel room investment

Hotel room investments are part business, part property investments. You’ll benefit from a known income and capital growth. However, this capital growth will be limited. They are also time-limited investments, with a specific expiry date. While the capital growth is guaranteed, if you wish to sell before the expiry date, you could find that you lose money if you want to sell earlier.

However, they cost less than buy-to-let investment properties, and start paying their income from the month after investment. They also have a lower cost of entry – typically around £65,000 versus an average of more than £200,000 for other properties.

Hotel room investments can be a great way to start your property investment career. They can also be invested in a pension set-up, thus benefiting from extra tax advantages.

In summary

The above is a summary of the main advantages and disadvantages of three property types that you could use to invest towards your retirement goals. When you reach retirement, you will probably want to be invested in buy-to-let properties that produce steady and growing passive income.

Contact one of our team today on +44 (0)207 923 6100., and we’ll help you develop a property investment strategy that will account for your personal circumstance and help to propel you towards the retirement lifestyle objectives you have set.

Live with passion

Brett Alegre-Wood


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