Buy-to-let properties are an excellent way to generate income during retirement, but how late is too late to get into the game? Bill Rawson, Chairman of the Rawson Property Group, explains the pros and cons of buying a rental property at retirement age.
“Any long-term retirement investment is going to be better the earlier you get started,” says Rawson, “and buy-to-let is no exception to that rule, but that doesn’t mean it can’t be a viable option in your sixties, or even your seventies, but it does depend a lot on your existing financial position.”
The delay between purchase and income stream is the main downside of buy-to-let at (or after) retirement. “Rental income can go a long way towards paying off a mortgage,” says Rawson, “but it’s quite difficult to cover all your costs with rent alone these days. In fact, you could be paying into your buy-to-let investment for years before you see any actual profit, which can be difficult when you no longer have a salary coming in at the end of every month.”
Financing itself can also be trickier the later in life you apply, as many banks have a cut-off age after which they simply won’t grant a long-term loan. “The age limits vary from bank to bank,” says Rawson, “and do depend on your financial history and relationship with the institution in question. It’s not unusual for older loan applicants to be limited to five or ten-year loan terms, however, which can seriously affect the affordability of the investment. A retired person will struggle to get a bond from the lack of ability to finance repayments over a shorter period.”
Even if you do qualify for a loan at a rate you can afford to cover until your investment turns a profit, you will have tied up a significant amount of capital in an asset that’s not terribly easy to dispose of in an emergency. “Property makes a great nest-egg, and can certainly be sold for a profit down the line,” says Rawson, “but that process can take a few months and isn’t going to help if you need quick access to a lot of cash. You may be able to use the equity in your loan account to cover emergency expenses,” he adds, “but the majority of your capital will be tied up until you decide to sell.”
These kinds of downsides aren’t exclusive to buy-to-let, however, and many long-term investments will have similar restrictions. Where income-generating property really stands out is in the benefits it offers, which are significant enough to have made it one of the most popular asset classes around the world.
“The first benefit of buy-to-let is the comparatively low risk profile,” says Rawson. “By generating income to cover some – and later all – of its costs, it minimizes the potential losses if things go wrong. This is very attractive in retirement, when most people are looking for financial security, rather than risky speculation.”
In addition to this, buy-to-let is one of the few investments that is almost guaranteed to keep pace with inflation, thanks to rental escalation and capital appreciation. “High inflation and currency devaluation can wreak havoc on conventional retirement savings,” says Rawson, “which is why an appreciating asset and an income stream that increases in line with living expenses can literally be a lifesaver. Even if you invest later in life, having that kind of security in future is invaluable, especially considering there is no ‘sell-by-date’ on a rental property – it can last a lifetime.”
This potential is the key to the appeal of buy-to-let as a retirement investment, and is still very accessible at age 60 or 65. “The longer you wait, the more difficult it becomes, and the more secure your finances need to be in the interim,” says Rawson, “but it’s never too late to buy-to-let successfully if you’ve done your homework first.”