Key Post "My investment property is my pension."

[Brendan Burgess]

As in can I sell my investment, purchase an ARF and would I be better off?

No you can't. On retirement, you can use your pension fund to buy an Approved Retirement Fund. It continues to accumulate tax-free and anything you draw down from it is taxed as income in the normal way.

Brendan

 

[RedOnion]

My understanding of the pension pot is that much of it disappears when you die

Not necessarily. Your point is true of DB pensions or annuities. There are many options to preserve wealth if you die.

However I do not think property is risky in comparison with shares and nobody on here ever has convinced me of that. The reason is that what care I if property falls in value, it makes no difference to me, if rents go down, I've enough lee way to cover that, voids, enough to cover those, interest rates hikes, similar (BTW that doesn't apply when the mortgage is paid off)

You're a bit of an exception!
You've more than 1 property, and some free cash. So you can accept the risks.
For someone with a single property on retirement, no other assets, and no cash the risk is high. Even without a mortgage.

I'm not against property as an investment. It's something I'm exploring myself, but only because I'm already using my full tax relieved pension contributions, and I aim to have a pension pot in excess of 1m. Again, I can accept the risk of a property investment. But I'd be uncomfortable heading into retirement with a single property asset as my only retirement fund.

 

[Brendan Burgess]

For someone with a single property on retirement, no other assets, and no cash the risk is high. Even without a mortgage.

Excellent point and I have updated the initial post accordingly.

Conclusion 2
It is extremely risking relying on just one property as your source of income in retirement. Even if you own it outright without a mortgage. Rents can fall. You might find it difficult to get a tenant.

 

[moneymakeover]

You misunderstood me. I was pointing out where was the 300K paid from. The investor in a normal rental, one not bought outright, from PAYE income, the actual property is paid for by the rent. But a pension has to be purchased over a long time period from your actual work income.

I agree
The 300k is gradually paid down by the tenants

 

[Bronte]

I know someone in retirement with a state pension, their home and one rental and no cash. No mortgages or debt. No credit card. Is that risky. Property cost about 100 IEP I think. Rents around 300 to 350 weekly.

Edit: about rents falling. This was over about 20 years, going from about 1995. Rents fell and rose over that time period. But not by exceptional amounts in this property.

 

[Bronte]

I agree
The 300k is gradually paid down by the tenants

Well Burgess and RedOnion don't seem to agree. I'm not sure how I'm to do the numbers that he wants though. The only person that's well able to do that is Cream Egg.

I'd also like to point out that the only people who became landlords that I saw lose out were the ones who payed crazy prices, on 100% or more borrowings, with interest only deals, where rent was never going to sort it out. Then it's risky as if you lose your job too in that scenario than you're snookered entirely. Now I think those were the Celtic Tiger Cubs, I've been around a while, and I never saw anything like that before or since. But that's a one off crazy aberration that is making everybody say property is risky. They should try buying like some of us back in the day when I was grateful to get a 9% mortgage.

 

[RedOnion]

Is that risky.

Everything is relative.

Are they relying on the rental income to get by? Can they adjust their lifestyle to manage voids / reduced rent? Can they pay for repairs (bathroom 5k, and boiler 2.5k spring to mind as examples).

RedOnion don't seem to agree

I'm not sure what I don't agree with?

I'm not against property as an investment

 

[Brendan Burgess]

The 300k is gradually paid down by the tenants

I am sorry, but this doesn't actually mean anything. I might as well say "my pension fund pays for my holidays"

If you want to compare investing via a pension and buying a property directly, you do an exercise like I did in the first post.

You compare the net income and capital gain of one with the other.

What you do with it is another matter.

If it makes sense to borrow to invest in a property, then it makes sense to have an interest only loan.



Brendan

 

[moneymakeover]

Not only does it not "not mean anything"
It is very significant
It was mentioned independently by Bronte,

"the actual property is paid for by the rent. But a pension has to be purchase"

Investing in property is complex and to compare with buying and holding shares is difficult.

There are comparisons. One I can think of, say person borrowed money to buy shares. And used the share dividend to pay the interest and possibly capital.

Average person will never be able to buy property without borrowing.

 

[Brendan Burgess]

Not only does it not "not mean anything"
It is very significant

Grand so.

Express it mathematically when comparing it to a pension investment.

Brendan

 

[Bronte]

Express it mathematically when comparing it to a pension investment.

How do you do it mathematically then? There must be a way to do it I guess. But I don't know how to do so.

 

[moneymakeover]

The rent is effectively a dividend
Significant and usually can offset interest initially
And capital in long term
We just need to choose a dividend rate


Another factor is the tax advantage where rental income can deduct interest before calculate tax

 

[cremeegg]

Excellent thread and a well balanced opening post.

In practice most property investment is not in a pension wrapper, and most property investment uses a mortgage. Property investment without a mortgage is a very different beast.

A number of posts are conflating cash flow with profit.

borrowing also magnifies the risks.

Not in the simplistic straightforward manner this is usually understood. This is usually taken as invest €100 there is €100 at risk; borrow a further €100, there is €200 at risk. A mortgage contract for 25 years or whatever is an obligation to pay x euro per month. No one should take out a mortgage without a high degree of certainty that they can meet the monthly payments. If you have this high degree of certainty, then the risk is correspondingly low.

mortgage payments plus tax is usually greater than rental income, so there is a cost to the property owner while they have a mortgage.

That is not a cost, its a funding requirement

On the point you didn't understand. I think it should be pointed out that an investment property can be purchases out of rent, whereas pension has to come out of PAYE income.

"the actual property is paid for by the rent. But a pension has to be purchase"

The funding for the monthly mortgage repayments does indeed come from the tenants whether in whole or in part.

Going back to Brendans original post, the pension investor would need to earn €166,000, and forego out €100,000 spending to fund the pension, hardly realistic for most. The property investor would need to earn €40,000 and forgo spending of €20,000 to fund the property purchase.