Investment meets downsizing

We are in the midst of the Baby Boomer juggernaut transitioning to retirement. With Baby Boomer’s making up a disproportionately high percentage of the population, downsizing is emerging as a hot topic in the media. There are many and varied considerations to take into account when determining your plan to enter into what we call the ‘flexibility stage of life’. We coined this phrase because we are living longer, which means working longer, resulting in more people scaling back employment as opposed to stopping abruptly! Where you choose to live as you transition to the flexibility stage of life is just as important and personal as where you choose to live while you are raising a family.

The questions you need to ask yourself are the same with any home buying purchase, such as:

1. What location would I prefer?
2. What dwelling type?
3. What personal factors will I prioritise such as access to family, friends and what types of amenities?

As with any major decision in life, the best thing you can do for yourself is to plan well in advance and think long-term!

A Property Plan that factors in downsizing the home enables you to plan to harvest equity through downsizing during this important time of life and will enhance your opportunities and choices (both financially and emotionally).

And let’s face it, the statistics suggest that most people will need to downsize due to lifestyle, financial or health drivers.

There are also factors that might need to be considered such as making the most of tax benefits and the extra incentives through the Super Boost Scheme if you are aged over 65.

One option you could consider is whether to purchase an investment property that could double as a potential downsizing home. This will eliminate the need to sell and then purchase another property as you enter the flexibility stage of life.

Owning one investment property in your preferred location for downsizing, allows you to maximise the likelihood of having a foot holding in the market(s) you are most likely to downsize into. This ensures you keep pace with your potential downsizing market.

This is a worthy consideration if the lifestyle property is an investment grade/quality property.

Should you end up selling because the investment property does not meet your lifestyle needs at that stage of life, you have at least kept pace with capital growth for the location.  You should strive to find the right balance between investment and lifestyle requirements.

A downside is that the purchasing process may take longer given the emotional connection to the property. At this point in time, we should carefully consider what the asset looks like and where you might be willing to compromise, undertaking the same process that we follow for all lifestyle purchases.

Considerations for this strategy include:

1. Could you downsize into an investment property? 
2. What time frame do you envisage this might occur?
3. Are you clear on your preferred location and asset selection for your downsized home?
4. Could you rent a superior property to live in while holding your existing properties rather than purchasing a downsizing home?

A Property Planner Tip is to look around at family and friends who are a generation or two older than you and understand what decisions have been made and why.

Especially those who have reached the flexibility stage of life and full retirement. The further off in the distance the decision to downsize is, the less likely you will be clear on what this stage of life looks like.

If you have an inkling of the location you would like to downsize into, but not great certainty, err on purchasing a property in a superior location to where you might downsize into so that you are more likely to outstrip the growth in value of your probable location you could ultimately live in.

If you are not looking to downsize into a reasonably sought-after location, for example a rural location for a tree or sea change, or a high-density CBD apartment that has few special features, we would suggest not attempting to purchase an investment property that could double as a downsizing home. This is because these types of properties tend to have lower capital growth prospects. Rather, a pure investment strategy would make sense.

If you decide to purchase an investment property that you can ultimately downsize to, it is possible you will want to stretch your budget to meet your future lifestyle needs for this purchase.

Some potential advantages of purchasing your downsizing sooner rather than later include:

1. No future selling costs.
2. No future purchasing costs.
3. Time saved not having to purchase in the future.
4. You could purchase a higher quality asset today.
5. If you later decide not to live in this property, but still live in the location, you will have kept pace with the market through a more sizable initial investment.

Some potential disadvantages include:

1. The additional financial stretch may be outside your tolerance for risk.
2. It may take longer for you to purchase your investment property and/or future investment property(s) may need to be purchased for a lower price point – however this is offset by the fact you purchased a higher quality asset earlier should you get a positive return.
3. Your return on the property might be reduced over the long-term relative to if you purchase a pure investment.4.   Changing your mind on the location that you decide to downsize into.

David is the Founder and Managing Director of Property Planning Australia, author of ‘How to Succeed with Property to Create your Ideal Lifestyle’, co-author of ‘Property for Life – Using Property to Plan Your Financial Future’, co-host of the ‘Property Planner, Buyer and Professor Podcast’ and a widely-published media commentator. With more than 20 years of experience, David is passionate about educating others to make informed, and ultimately, more lucrative property investment decisions. David established Property Planning Australia in 2004 – with the vision to educate and empower Australians to make successful property, mortgage strategy and money management decisions.  Property Planning Australia’s operations have earned acclaim and national industry awards for its unique fusion of property planning, education, money management, mortgage strategy and risk management. All supported by multi award-winning customer service.