Retirement income from property?

Dithering_Dad · 8 May 2009 at 11:42AM

I've always thought that property would play a large part in helping me enjoy a comfortable retirement, but only in so far as having a mortgage free home. The other items in my retirement 'bundle' would be the various money purchase pensions I've accrued with a selection of companies (now combined into a SIPP), ISA savings and now my superduper Final Salary pension that I've got with my new employer.

I toyed with the thought of BTL in the past, but I've never been in the position to make a purchase - I'm cautious by nature and repelled at the thought of getting into a large amount of debt to fund an investment. I'm also a little put off by the thoughts of having to maintain the properties, having vacant lets or having troublesome tenants. The alternative I have to BTL is to keep moving up the property 'ladder' and then downsize at retirement. The advantage of this is that you get to enjoy your investment every day and there are no capital gains tax or income tax to pay on the gains. The downside would be increased bills, council tax and maintenance and the possibility of the downsizing coinciding with a HPC.

After working like mad over the last few years with my business and now with my new employer, I am reaching a point where I have a lot of disposible income and I'm reaching a crossroad in my finances.

The way I see it, I have the following options:

1. Continue to blitz my mortgage until it's gone (probably within the next 5 years), salt the maximum away in my & Mrs D's ISAs, salt money away into Mrs D's pension plan. We could have a very comfortable life with no real worries. When we retire we could sel our current house and buy a 2 bed cottage with a bit of garden and fund retirement with a combination of 2 personal pensions, a final salary pension and ISA investments.

2. Buy a shop that I have seen in our local village that has 3 floors and a cellar. Convert the top two floors into two 1 bed flats and rent them out, renovate the ground floor and cellar and let them out as a shop with stockroom storage in cellar. Once the mortgage for this place is paid off, I'd be looking at retiring with all of the pension income from option 1, but with a reduction in the ISA investments, plus rental income from the shop and two apartments.

3. Same as step one, but to forego the comfortable and secure life in the short to medium term in order to buy a substantial home, but to (hopefully) secure a much more secure and wealthy retirement in the long-term.

The least risky is step 1, where in 5 years time I can see myself being pretty much secure from anything that life could throw at us, including job loss. Step 2. is less secure in the short-term because I would divert some cash from my overpayments to buy and renovate the shop and to subsidize it until tenants were found. Once the shop paid it's own way I would revert to mortgage overpayments on our home. The most risky is step 3. This would extend our finances and leave up open to losing a lot of money if I lost my job. We'd be stretched financially but if it all worked out we'd have a beautiful home and a major nest egg to ease us into retirement.

Each option has it's own appeal and risks (even option 1 - I could take the 'safe route' during my working life, but then have a much reduced lifestyle in retirement).

Which option would you take, and why?

(I'm hoping Conrad contributes as I know he has commercial lets, it'd be very interesting to hear about his experiences in this area).

Cheers in advance for all contributions

StevieJ · 8 May 2009 at 11:50AM

Are you now with an oil company ?
Al three leave you with a reasonable retirement, so you may as well go for the one with least risk.

PasturesNew · 8 May 2009 at 12:57PM

As I see it, you're interested in renting property out, but scared. You're interested in a larger property, but not the costs.

Have you looked at buying a larger property "now" that has a separate lettable annexe? That way you might get to have your cake and eat it. You have the lower bills, the HPI, the income and the tenant is less likely to be an awkward one if you're there too. Many renters wouldn't want to rent an annexe from a landlord who is present. So long as you're just present and not omnipresent I'd prefer it because I'd think it would make the annexe/my home more secure (burglary-wise).

Thrugelmir · 8 May 2009 at 1:11PM

Option 1. As that still leaves the door open for Option 3 in the future.
The ability to act quickly could prove extremely profitable over the coming years.

Option 2 is high risk for a novice BTL investor with too many unknowns. No tax advantages. ISA's and Pensions now provide better returns for retirement.

If you want to invest in property why not add a commercial premises to your SIPP. It would be free of tax and the rental income can be paid back into the SIPP. Far more tax effective than investing in property direct.

Jonbvn · 8 May 2009 at 1:19PM

I'm in a very similar position. IMHO given the present economic situation, NOW is not the time to make life changing decisions. Given this, I would go for option 1. This will allow you to change to options 2 or 3 in the future.

If you go for option 2 or 3 it is difficult to revert.

treliac · 8 May 2009 at 1:24PM

PasturesNew wrote: »

As I see it, you're interested in renting property out, but scared. You're interested in a larger property, but not the costs.

Have you looked at buying a larger property "now" that has a separate lettable annexe? That way you might get to have your cake and eat it. You have the lower bills, the HPI, the income and the tenant is less likely to be an awkward one if you're there too. Many renters wouldn't want to rent an annexe from a landlord who is present. So long as you're just present and not omnipresent I'd prefer it because I'd think it would make the annexe/my home more secure (burglary-wise).

Hey Pastures, DD has already invited you to think about relocating to the Manchester area!! Are you now thinking you might move in? :rotfl:;)

PasturesNew · 8 May 2009 at 1:35PM

treliac wrote: »

Hey Pastures, DD has already invited you to think about relocating to the Manchester area!! Are you now thinking you might move in? :rotfl:;)

LOL ... I must have missed that posting then.

But, no... it's full of northerners :P

dopester · 8 May 2009 at 2:05PM

That shop idea.

What do you imagine will be sold from the shop? It may be a village shop and supply there may be limited, but that doesn't mean trade and shop profits are going to keep rolling in. Can't hold locals hostage as you have one of few shops in the village to charge higher prices when they have less money, or are being more careful with their spending.

Would you run the shop or would you get a tenant? Around the UK there seems a lot of supply as more shops are becoming vacant. I'm not saying all shops are doomed to failure but shop location, and what you are selling, may be increasingly important. Lots of supply around, pressuring rent values.

7th May 2009. The Move Channel

Landlords are ramping up inducements as they attempt to secure a letting with sharply rising available space exerting greater downward pressure on rents.

‘Surveyors are now more pessimistic than ever before with 80 per cent of surveyors expecting a fall than a rise in rents. The value of inducements (a lead indicator of future rental trends) rose at the fastest pace in the survey's history as landlords continued to try to boost demand with incentives,' it said.

The immediate outlook for lettings activity remains poor as the net balance of surveyors reporting new occupier enquiries remained in negative territory. However 38 per cent more surveyors reported a fall than a rise in new enquires for business space compared to 63 per cent in the last quarter - the least negative reading in a year.

‘Given the gloomy backdrop for the sector and expectation of further rises in vacant space, RICS is disappointed that the Government failed to address the issue of empty property rates in the recent budget. This is encouraging the demolition of perfectly good buildings, discouraging speculative development and could result in more far reaching problems when the economy starts to pick-up again.'

Love the spin. 10,000 surveyors - 63% = 3700 not reporting fall in new enquiries. 3700 surveyors - 38% = 2294 surveyors are still not reporting fall in new enquiries.

What about non-domestic rates (NNDR)? Apart from some relief/exemptions or temporary exemptions, won't you be charged whether you have someone trading from the shop and making a profit or not? Lot of people feeling the squeeze with this.

dopester · 8 May 2009 at 2:17PM

This thread: Retirement income from property?

You might as well say you are looking for a home with capital when the world has changed drastically.

How can I squeeze the value-producing part of society and business, to use my capital and have them pay from their profits and income to support my own lifestyle?

The world has changed. IMO you'd be best of searching-out a number of companies who have business plans and new ideas for successful trade, and seed-invest in them. Instead of trying to join those landlords who are dying now the consumer boom is over, incomes are falling, credit is tighter, and business premises and shops that once were profitable have bleaker futures.

That isn't to knock you DD. I just want the best for you, honest.

Dithering_Dad · 8 May 2009 at 2:20PM

Thrugelmir wrote: »

Option 1. As that still leaves the door open for Option 3 in the future.
The ability to act quickly could prove extremely profitable over the coming years.

Option 2 is high risk for a novice BTL investor with too many unknowns. No tax advantages. ISA's and Pensions now provide better returns for retirement.

If you want to invest in property why not add a commercial premises to your SIPP. It would be free of tax and the rental income can be paid back into the SIPP. Far more tax effective than investing in property direct.

I did consider this as the SIPP could buy the premises and then as you say, the rental of the shop would go straight into the SIPP without taxation. Unfortunately, the two flats above are residential and so their rental would not go into the SIPP and would be taxed at my higher rate (outside a SIPP, I could put the premises into my missus' name as she is a non-tax payer). I could split the premises and use some money from my sipp to buy/renovate the shop and buy/renovate the remainder from my savings, but I'm very reluctant to put my SIPP money at any sort of risk - especially when one considers that it's been 10 years in the making!

It is certainly something I've considered (SIPP), as it would mean that the shop could be bought and renovated mortgage free and the flats could be bought and renovated with a large mortgage, allowing a high degree of tax relief.

Decisions, decisions!!

Dithering_Dad · 8 May 2009 at 2:23PM

Jonbvn wrote: »

I'm in a very similar position. IMHO given the present economic situation, NOW is not the time to make life changing decisions. Given this, I would go for option 1. This will allow you to change to options 2 or 3 in the future.

If you go for option 2 or 3 it is difficult to revert.

I hear what you're saying and certainly the shop idea would have to be pursued sooner rather than later, which, as others have pointed out as well, not great timing. Unfortunately, if it was great timing, then the shop would not be available at such a low price. Catch 22. I suppose.

The house purchase could be put off for 12 months, timed to occur when my current mortgage deals runs out. This has better timing because at least we'll have a better picture of what's happening in the housing & economic markets by then.

Debate House Prices

Retirement income from property?

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