What To Do With Investment Property In Your Retirement

Why your investment property should not join you in retirement

New Zealanders share a cultural obsession with residential property which borders on a religion. For decades, the path to financial respectability has involved a steady accumulation of suburban titles, typically fuelled by aggressive leverage and a stoic endurance of fluctuating interest rates.

If you find yourself approaching the age of sixty-five with one or more rental properties, congratulations, the chances are you have officially won the game. Your capital gains represent a masterclass in patience, tax efficiency, and market timing. You have endured tenant trouble, leaking taps, and the ever-shifting whims of whoever inhabits the Beehive.

However, a behavioural blind spot often occurs at the finish line. Many investors, having spent thirty years or more treating their properties like a fortress of financial security, find it difficult to dismantle the fortress walls when the time comes to enjoy the view. There is a psychological anchoring to physical assets which makes the prospect of selling feel like a retreat rather than the triumph it is.

Holding residential property deep into your retirement years is usually a case of the tail wagging the dog. Here’s why, and what you might do instead.

Why Sell an Investment Property in Retirement? The Mathematics of the Yield Gap

The primary reason to reconsider your property portfolio at retirement is the brutal reality of net yields. During the accumulation phase, property is a superb vehicle for wealth creation because of leverage; you are using the bank's money to capture gains on the full value of the asset. Once you retire and the mortgages are cleared, the calculus changes entirely. You are now looking for a regular income from your capital.

In major urban centres like Auckland, gross rental yields often hover around four percent or less. This is the total income you receive for the property. For example, a $1 million dollar property may achieve rent of $730 per week, which is about $38,000 per year. So, the rental yield is about 3.8 percent.

Then, you need to pay a range of costs. Maintenance, insurance, property management fees, and the ever-increasing burden of local body rates (property tax), your net pre-tax yield will probably reduce to closer to two percent. For an investor with a million dollars tied up in a freehold rental property, a two percent net return provides $20,000 of pre-tax annual income. While that is not a pittance, it is a remarkably poor before-tax return for the level of risk (and potentially personal effort) involved.

In retirement, the value you require is reliable, passive cash flow; something a thirty-year-old weatherboard house is fundamentally ill-equipped to provide.

A diversified portfolio of global equities and fixed interest can comfortably support a four to five percent withdrawal rate for decades while maintaining a much higher degree of resilience.

Property’s Concentration Risk: One Postcode to Rule Them All

Most New Zealand property investors suffer from a lack of diversification. If your family home is in a leafy Auckland suburb and your one or two investment properties are in the same area, your entire financial well-being is tethered to a single geographic postcode.

You are effectively betting your retirement on a perfect run of luck: no adverse zoning shifts, no neighbours building eyesores, no bungled infrastructure projects nearby, and an absence of localised natural disasters.

This concentration is a gamble which many take without realising the stakes.

By contrast, a diversified global portfolio spreads your wealth across thousands of the world's most profitable companies, and different asset classes. If a tech firm in California falters, your exposure to European consumer goods or Asian manufacturing balances the scales.

Holding all your wealth in New Zealand bricks and mortar is a missed opportunity to engage with the rest of the world. A diversified approach to global markets offer a level of protection which the New Zealand residential real estate sector simply cannot match. For a retiree, the risk of concentration is magnified because there is no longer a salary to act as a safety net.

The Myth of the Passive Investment

Property is often marketed as passive income, a term which surely brings a wry smile to any landlord. Property management is an active business. Even if you employ a property manager, you remain the Chief Executive Officer of an aging infrastructure company. You are responsible for compliance with Healthy Homes standards, the aesthetic upkeep of the dwelling, vacancies, and the occasional legal drama.

In retirement, time might not be on your side. There is a certain irony in spending your golden years worrying about whether a tenant has cleaned the gutters. One must ask if the mental load of property ownership is worth the limited cashflow. Transitioning to a portfolio of managed funds or exchange-traded funds (ETFs) truly automates your income. There are no surprise plumbing emergencies in a diversified bond fund.

Property Investment Illiquidity and the "Kitchen Sale" Problem

One of the most significant drawbacks of real estate is its inherent lack of liquidity. Real estate assets are lumpy. If you decide you want to spend fifty thousand dollars on a world cruise or a new European SUV, you cannot simply sell the kitchen of your rental property. You must either take out a loan, which can be all but impossible for retirees without a traditional salary, or you must sell the entire asset.

This all or nothing nature of property ownership creates a rigid lifestyle. Retirees often find themselves house rich and cash poor, sitting on millions of dollars of real estate equity while checking the price of fruit at the supermarket.

By contrast, a liquid portfolio allows for precision. If you need $20,000 for a family emergency, you can sell exactly $20,000 worth of units in a fund, or shares, and have the cash in your bank account within days.

Legislative Volatility: The Uncontrollable Factor

It is always wisest to focus on controllables: your behaviour, your spending, your mindset, and your allocation of investment assets. We do not spend much time worrying about what the politicians in Wellington are doing because we cannot change them. However, it must be acknowledged the New Zealand property market is a favourite playground for legislative tinkering.

From the Bright-line Test to interest deductibility rules and the Residential Tenancies Act, the goalposts for landlords are constantly moving. Murmurs about a capital gains tax or wealth tax on property seem to pop up with increasing regularity, and it’s never clear what a future politician might do.

A retiree should seek simplicity and stability. Holding property subjects your primary source of income to the political whims of the day. A diversified portfolio, possibly when held through a tax-friendly Portfolio Investment Entity (PIE) structure, offers a far more stable tax environment. It allows you to step away from the headlines and focus on your own life, rather than wondering which tax perk might be abolished in the next budget.

The Winner’s Mindset: Taking the Win

The most difficult part of this transition might be the ego. It feels good to say you own a rental property, or five! It feels safe to see the dirt and the bricks. But the goal of investing was never to be a landlord; the goal was to achieve financial independence.

If you have reached retirement with a significant property portfolio, you have already won.

There is no prize for being the richest person in the cemetery who still owns a block of flats. Taking your winnings off the table by selling your investment properties is an act of supreme self-reliance. it is a declaration you no longer need to take significant risks to reach your goals. You have arrived.

The successful New Zealand investor, at-or-near retirement, should view their investment property (or properties) as a crop which has finally reached harvest. You don't leave the crop in the field forever to prove you are a good farmer; you pick it, sell it, and enjoy the proceeds. Transitioning into a diversified portfolio is simply the process of harvesting your hard work.

Property Investment and Estate Planning

The estate planning benefits of a successful exit from property cannot be understated. Dividing a single physical asset among several heirs is a recipe for family tension and billable hours for lawyers. Even if you think dividing a single-family home is easy, think again. Even the most harmonious families find their bonds tested by the inflexible nature of real estate. We often observe good people, motivated by entirely different life stages, clash over a single kitchen.

1. One child might require an immediate cash injection to fund a business venture or get through a tight financial spot,
2. Another may harbour a sentimental (and expensive) desire to hold the family asset forever, and
3. A third might push for a renovation and wait for a more favourable sellers’ market.

This is the illiquid asset problem in its most destructive form. Physical property cannot be sliced into three equal parts without destroying the value of the whole.

Dividing a liquid portfolio is a matter of a few keystrokes. Leaving your heirs a clean, divisible, and liquid inheritance is perhaps the final witty observation one can make about a life well-lived: the best legacy is one which doesn't require a lawyer to settle.

A Practical Path Forward

If you are nodding along but feel the weight of inertia, consider a phased approach. You do not have to sell everything on the day you collect your first NZ Superannuation payment. If you have the inclination and funding, you might look to improve a property by renovations, or simple improvements to increase the home’s value. Individual situations can vary greatly, though if you have more than one property you might sell properties over a period, perhaps five years. You could start by assessing which property in your portfolio has the lowest yield or the highest maintenance requirements.

• Sell that asset first.
• Move the proceeds into a diversified, tax-efficient investment approach.
• After appropriate retirement planning, carefully factoring in your needs and risk appetite, you can establish an income arrangement which typically will sell a tiny fraction of your investments regularly.
• The proceeds from these micro-sales can then be paid to you, perhaps weekly or monthly. It’s up to you.
• Gradually draw down and spend that money to fund your life.

Then you can experience the freedom of receiving a monthly distribution without having to check your email for a message from a property manager. This methodology places you in the driver’s seat.

How Long Will Your Money Last?

One of the big questions investors have is: “If I am regularly selling a portion of my assets … and spending them, how long will they last?”

Well, it depends on:

• How much you invest at the start. The more you have, the longer your money lasts.
• How much you want to spend. The less you want to spend, the longer your money lasts.
• The returns you get on your investment. The higher the return you get, the longer your money lasts.

But the money may last longer than you think. Because over time, you’ll likely get some returns on your investments. Here’s how.

Your Retirement Nest Egg Might Last Longer Than You Think

Let’s say you sell your investments and have $1,000,000.

You decide to take out $40,000 per year (about $770 per week) to live on.

After taking out $40,000, you have $960,000 left invested.

Now suppose your investments earn three percent per year, after fees and tax.

• Three percent of $960,000 is $28,800.
• So by the end of the year, your balance is:
• $960,000 + $28,800 = $988,800

Even though you withdrew $40,000, your total balance only dropped from $1,000,000 to $988,800.

That’s a drop of just $11,200, not $40,000. Because your investments kept earning money.

Many people think $1,000,000 divided by $40,000 means the money would last 25 years.

But if you consistently earned net three percent per year, the money could last around 44 years, even while taking out $40,000 each year.

Of course, in real life, investment returns don’t come in a smooth, steady three percent every single year. Some years might be higher. Some years might be lower. Some years could even be negative as investment markets go up and down. There will be good years where your balance grows faster than expected, and tougher years where it might fall. That’s completely normal. This example just uses a steady three percent to make the maths easy and to show the basic idea.

The Bottom Line: What To Do With Rental Property When You Retire

Your investment property or properties served you well during the climb, but they are heavy packs to carry during the descent. By selling your investment properties, you are locking in your gains by changing its form into something more useful, more liquid, and significantly less stressful.

If you’ve climbed the mountain as a successful property investor, well done. You have won the property game. Now, it is time to enjoy the victory. A life of travel, family, and leisure is much easier to manage when your wealth is working for you, rather than you working for your wealth.

If you’d like to discuss the tools you need on your next chapter, to assist transition from a landlord to a retiree, our team are standing by to help. That includes helping New Zealanders turn their hard-earned assets into reliable, passive income, so retirees like you can spend your retirement focusing on what you enjoy. Book a complimentary initial consultation with our team.