Hobson Wealth Partners’ Brad Gordon asks if rental property portfolios are worth the hassle for Kiwis at retirement age
For many New Zealanders on the verge of retirement, a commonly-held asset (outside of the family home) is a rental property or two, sometimes more. Some in this group of people may be in the fortunate position of being able to sell down one or two properties if need be – and using the capital freed up to clear any debt on the remainder of properties they own.
The substantial wealth that has been generated in this manner over the past two decades, particularly from tax free capital gains, cannot be disputed.
Of course, as is the case with any capital asset, the spoils aren’t always shared equally. There are many locations around the country which far outperform others in this respect. For example, according to REINZ data, Auckland’s five-year growth rate at 12.5 percent per annum has seen the highest growth amongst the major cities and compares to 4.6 percent per annum in Canterbury, the lowest of the regions; and individuals unfortunate enough to have owned leaky homes, P-damaged homes, or who have suffered significant damage at the hands of tenants are no doubt far less bullish.
So, once you’ve reached retirement, does a rental property portfolio option reap the same level of benefits as the wealth generation effect?
Many who opt into owning rental properties use that income to get by day to day, supplementing their NZ Superannuation entitlement. The key issue here is the difficulty of accessing capital gains to cover major one-off costs – you can’t sell a room to fund an operation or overseas holiday, and are therefore reliant on that rental income to meet these, as well as day-to-day needs.
Owning a rental property doesn’t come cheap. Ongoing costs including rates, insurance and maintenance – and it’s not often that years go by without an electrician or plumber. What’s more, the cost of servicing many of these expenses is increasing at a higher rate than any growth we’re seeing in rental income.
And in the event of significant maintenance costs – such as to re-paint, replace the roof, wiring or plumbing – many of these bills will be in the tens of thousands of dollars. How do you fund that from the rental income and still put food on the table?
The fact is there are other assets that can provide high-income yields without the risks associated with residential rental property.
A quick look at median rental data and house price data from REINZ shows that the average gross yield (annual rent divided by value of the property) before regular expenses is around 5 percent nationally, and just 2.9 percent in Auckland.
Going a step further, if we take into account those regular, unavoidable costs such as rates and insurance, and make a reasonable assumption for annual maintenance, the pre-tax yield drops to 3.7 percent nationally, and 2 percent in Auckland.
Even without consideration for the significant maintenance items (every five to seven years) which will likely completely consume the rental stream, nor any period the property is left vacant by tenants, the numbers don’t leave much of a return on capital for living.
The fact is there are other assets that can provide high-income yields without the risks associated with residential rental property.
Let’s consider the example of Auckland Airport, as one of New Zealand’s “blue chip” companies. Auckland Airport has a gross dividend yield of 4 percent, which has consistently grown by more than 10 percent per annum since listing in 1999.
A financial investment portfolio, across similar companies including Auckland Airport, Chorus, Vector, Goodman Property and Trustpower – all of which own significant infrastructure and property in New Zealand and have provided consistent dividend growth over many years – would have generated a pre-tax dividend yield of 6.8 percent over the past 12 months.
It’s likely that any financial asset portfolio (held in place of rental property), would be more diverse than this – but the example clearly illustrates the point that with good quality assets outside of rental property it’s possible to achieve a much higher income stream.
Not only that, but the diversification significantly reduces the risk of having a year or more of income wiped out, and in the event of any one-off expenses such as holidays, or operations, the process of selling shares to access those funds is far more straight forward.
Once in retirement, capital growth and income requirements often shift significantly for most – and owning a residential rental property may not provide the income safety net or return on capital many people need to fund their retirement.
The choices are yours. As the American playwright Tennessee Williams once said, “You can be young without money, but you can’t be old without it”.
The views expressed in this article are those of Hobson Wealth Partners Limited, an NZX Firm. The disclosure statement for Hobson Wealth is available free of charge by contacting us on 0800 742 737. This article contains class advice only and does not consider objectives or situation of any particular investor. It should not be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from engaging in any transaction. We recommend that you consider the appropriateness of information to your situation and obtain financial, legal and taxation advice before making any financial investment decision.
