Why you should buy your future retirement home now!
or at least 5 – 10 years before retirement

Changing demographics in Australia are ushering in a new norm when it comes to housing types. This change in the type of housing will, and is already, creating opportunities for owner occupiers and investors alike.

The impact on those of us moving towards retirement is significant and in fact may surprise and even shock those who are looking at future lifestyle options.

For many years the “must have” element for a residential property was land. Land and lots of it. And this was where most of the capital growth was. Quarter acre blocks (1,000msqm), larger if possible, was what we all wanted, especially for our family homes.

 

But as the saying goes, they’re not making any more of it.

Australia is a very large country and has lots of land so why is it, that the size of housing blocks around the country is reducing rapidly? The answer is access to infrastructure and quality amenities. These amenities such as coffee shops, theatres, transport etc are critical to the lifestyle aspirations of most people today and those amenities are always located close to our major population centres.

There is simply not enough land left close to the centre of our cities for everyone to live, so housing blocks are becoming much smaller and more people are living in apartments, townhouses and terraces. Only the very wealthy can live on large blocks of land close to where the amenities are and to the centre of our cities. It is the convenience and enhanced lifestyle provided by these amenities that is attracting an increasing number of retirees to these locations.The chances are that these lifestyle facilities will be attractive to you too. Most of us have no intention of living the quiet lifestyle in our active later life. So herein then lies the challenge.

 

Where you want to live in retirement is more likely than not appreciating in value at a faster rate than your current family home

Where many of us would like to live out our retirement years is, more than likely, increasing in value at a faster rate than the home in which we are currently living. This is despite the fact that we may currently live in a large suburban
home in a good location.

 

Our intention is to downsize when the time is right.

But it is where we hope to downsize to, the location, which presents the problem. The reason is that this maybe exactly where many others will want to downsize to as well.

Whilst land will always retain its importance as one of the most desirable aspects of the value of a residential property, it actually comes second fiddle to position.

Position, position, position is the old adage which is quite rightly held up by every property expert as the penultimate characteristic of a great property. This is the reason why you need to plan now and to avoid disappointment and unwanted compromise in your plan for the perfect retirement home.

The reality is that most people do not consider where they are going to live in retirement until they are actually close to retirement. They are too busy with life and all its demands to really plan how they will live after they become empty nesters. Little thought is given as tohow they will spend their time after they finish their paid employment. Most would like to take the time, whilst they still have their health, to travel, maybe visit family and friends and to do all those other things they have denied themselves during their working years.

With hopefully many years in which they can enjoy the fruits of their labours however, and without planning, the outcome for many people may not be quite as they had hoped for. The facts are that a very large percentage of impending retirees or future retirees all want the same things. To be close to the action, that means coffee shops, easy transport, hospitals, movie theatres, cultural facilities and so the list goes on. For some it may even mean a home at the beach, although for most it will be in the cities where their family and friends are. The desirability of the locations where those properties are, means that the growth in value of the properties in those locations may be greater than the growth in value of the properties in which they currently live.

 

Let us just consider some of the facts

Many if not most people will eventually downsize from their current, often larger, home for lifestyle and or health reasons, sometimes a combination of both of these reasons.We expect that most people would prefer to remain part of the mainstream of society until their options are removed. Ideal retirement properties will, other than location, be single level properties, houses on small blocks of land, townhouses or villas or an apartment in a building with a lift. These are the only options which will extend the independent lifestyle of a person who does not want to contemplate moving to a retirement village earlier to live with other older people.

Most people have an expectation that not only will the sale of their current residence provide the necessary resources to buy the “NEW” downsized property but also, because they are downsizing, there will be additional funds left over after the transaction to add to their retirement resources. We don’t believe that this will be the case for most people, with many finding that their ideal retirement property costs much more than they expected. In simple terms these are your options.

What are the implications of waiting until retirement to buy your new future retirement home?

 

Option 1

Do nothing now, wait for retirement & then consider relocating.

As this simple chart below demonstrates, after 10 years at a modest capital growth of 4% p.a. our home currently worth in our example $750,000 would have risen in value to about $1,100,000.

If we sell this property we will have those funds available, less selling and buying expenses, to apply to our new “lifestyle” retirement home.

As a best case scenario and if we spend considerably less than the proceeds of the sale of our current home there will be some funds left over to add to our retirement pool.

But if we can’t find a property we like that costs less than the value of our current home, our only option will be to dig deeper into our pockets to buy the home we would really like to live in. This may force us to put off the inevitable move, as it is too difficult to make a decision and we don’t like the resulting compromises we will have to make.

What can we do and why it makes so much sense to do it.

 

Option 2

Buy your future retirement home now and retire or relocate to that property in 5–10 years

This simple chart to our right assumes the home we intend to live in in the future is purchased for a similar value to our current home. With this option and assuming once again a modest capital growth of 4% p.a., we now have two properties (not one) each valued at $1,100,000 after 10 years (i.e. $2,200,000).

If we borrowed the full amount of the purchase price of the second property, we will still have a debt of $750,000. This is assuming we don’t pay anything off the mortgage on the second property (interest only loan). When the time comes for retirement we sell our current home and move into the second property purchased for retirement. We will have the sale proceeds of our current home of $1,100,000 less expenses to pay out the mortgage on the home we are moving into for retirement.

We will be debt free and there will be money left over to update the new property (if required) and even some money left over to contribute to our retirement funds. NB This will be the case even if the new property you intend to live in later is increasing in value at the same rate as the increase in value of your current home.

Now as discussed on the previous pages, what if the new lifestyle property is growing in value at a faster rate than the rate of growth of your current home?

The above graph shows that if the value of your future home appreciates at a rate faster than your current home because of its more desirable location, then the future retirement home will have increased in value over and above the increase in value of your current home by almost another $250,000. The consequence of not planning and purchasing your future retirement home early may be that you will have to raid your retirement funds to live where and how you would like to live in the future. We believe that the only other alternatives will be to stay put in your current home until it becomes too much for you to manage or for you to buy something which costs less than the value of your current home. Based on where we think more people will want to live, the strategy of not planning and not buying your future home early may be a huge compromise on how you had pictured your lifestyle in retirement.

 

The Strategy

The strategy is to select and purchase your future home early. Rent out that property as an investment for 5-10 years, before relocating to your new home when downsizing or retiring. Your future lifestyle in retirement is now much more certain.

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