With the first vanguard of baby boomers stepping into retirement, in many cases without adequate superannuation, Generation X is starting to realise that they need to take investment seriously if they are to avoid this fate. The GFC rattled everyone’s cage and provided the wake-up call that dropping money into a superannuation fund and expecting the entire investment to keep performing is simply not enough. As we now realise, anything can happen in the world of finance, so it is vital to have a fall-back position, and one of the ideal vehicles for this is an investment property.
Providing a back up to superannuation is not the only reason that investment properties are attractive. Another obvious benefit is the use of negative gearing to reduce a tax liability. This is a legitimate strategy where the income produced on an investment property does not cover the costs of the loan to acquire it. This creates a loss that reduces the investor’s tax liability. With no changes proposed to the negative gearing system, investment properties will continue to be attractive as a tax minimisation strategy.
Another benefit of holding investment properties is the prospect of making a capital gain. This is attractive for two reasons. The first is that capital gains tax is not payable until the property is sold which could be 10 years or more down the track, giving the investor the opportunity to accumulate funds to cover the tax liability. The second is that even though the property market in Australia has suffered in the past couple of years, there are still good gains to be made if the property has been held for some time.
Owning an investment property in Liverpool provides an opportunity for the investor to build sufficient equity in the property to use as security to purchase a second property, then a third or more. A key part of this strategy is to have these investments under professional property management like Prudential Liverpool to maximise the rental incomes. If the acquisition of additional properties is paced to suit the market, the risk of having a mortgage debt that cannot be serviced is reduced. Being forced into the situation of having to sell one or more properties to service the debt of another is a poor outcome that should be avoided.
The investor with a number of properties that are performing well and not burdened with too high a level of debt is in a good position to liquidate a property or two if cash is required for an emergency, or perhaps to top up their superannuation fund. Of course, this depends on the state of the property market at that time, but it does provide the investor with a sense of security that more than one option is available if required.
These long-term strategies will provide the greatest benefit to Generation X, who has the opportunity to start working now on using investment properties to supplement their superannuation. If they arrive at retirement as poorly prepared as the baby boomers they only have themselves to blame.
