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Renting out paid-off property: Is that enough as a retirement provision?

The year is 2023: Gross domestic product has been falling for four quarters (Q4 2022 to Q3 2023) and the inflation rate is around 4 percent. Prices for drinks and tobacco have risen by around 9% and for food by around 6%. Conventional forms of investment such as call money accounts and savings accounts are not yielding an acceptable return and fears of a prolonged recession are spreading.

Many employees who have worked all their lives for an enjoyable retirement are seeing their dreams shattered. And they ask themselves with regret: What did I do wrong? And why did I never take care of my retirement provision myself and always relied on others instead?

Fortunately, you invested money in a property around 25 years ago, which you have been renting out ever since. This earns you another 1,000 euros every month. And for the rest of your life. There are many ways to boost your pension. The safest and most profitable option? A property as an investment and for retirement provision in the form of a rented condominium.

In addition to the benefits of a lucrative source of income, real estate as a retirement provision and capital investment also has other advantages. If you have the property purchase financed by a bank, the investment is possible with just a small amount of equity. Your tenant indirectly pays off the mortgage for you and you can continue to build up your wealth year after year.

Further advantages:

Provision for retirement with real estate: tax

You already know that the sale of a property is tax-free after ten years. However, there are other ways to make tax-efficient use of a property as a retirement provision. There are numerous items that you can deduct from tax as an investor. These include, for example, all income-related expenses, depreciation on the value of the building or apartment, insurance costs, tax consultancy costs, financing costs (interest) and ancillary costs for refuse collection or janitor services.

Provision for old age: property or ETF/shares

ETFs and shares could be an alternative to real estate. The only thing you need to bear in mind is that you will receive a lower return but accept a higher risk. Shares are very dependent on economic developments. If the economy suffers, your portfolio suffers. We are currently experiencing this again.

If you still want to build up a passive income with shares, you should focus on dividend stocks that bring you recurring profits. In the case of growth stocks, the profits are reinvested in the company. Shareholders may then benefit from high sales prices in the future. But only possibly. This is pure speculation and should not be considered as a secure retirement provision.

Other options:

Retirement provision – real estate, farmland, precious metals. Farmland could be a lucrative alternative. However, smaller investors have little access to this type of investment. Precious metals would also be conceivable. However, these do not generate any regular income. The best alternative is still real estate. Even a small condominium can significantly boost your pension once the tenant has paid off the apartment for you.

Property as a retirement provision: Who is it suitable for?

Basically, the earlier you start, the better. However, we also have clients who were well over 50 when they bought their first property.

The decisive factor is not age, but the investor’s goal. Paying off a property within a few years is only possible with very high repayment installments. If you are a little older, you should therefore invest more equity and pay off the property loan quickly. This will allow you to benefit from a full cash flow when you retire and you will no longer have any costs for repaying the loan. Conclusion: A good investment for pensioners.

As a young investor, you have significantly more options, but when does a property start to pay off as a retirement investment? If you invest in your first property in your mid-20s or early 30s, you are in the best position. To obtain real estate financing, the bank only requires a minimum salary of around EUR 2,500 and a small amount of equity. The rental income generated by the property should cover the financing costs. In most cases, this results in a neutral cash flow of +/- 0 euros. Young investors who acquire their own cash flow properties have two major advantages:

  1. They lay the foundations for a prosperous future in which they receive passive income from their property(ies).
  2. You do not feel the financial burden, as the financing installments are paid by the tenant

This makes the property suitable as a retirement provision for all ages, although it is even easier for younger investors due to the long term.

Property for retirement: pros and cons

Pro Contra
Positive cash flow in old age Some equity required, i.e. at least the ancillary purchase costs should be covered by equity
Financial burden hardly noticeable, as tenant bears the repayment and costs of the loan Creditworthiness is a prerequisite
Currently still relatively low interest rates Monthly income of at least 2,500 euros required
Statutory pension is too low – pensioners can afford significantly more with property
In the event of death: bequeathing real estate to children, grandchildren, etc.

Riester pension for real estate purchases

The state also supports real estate as a retirement provision. The Riester pension is a state subsidy that anyone who pays into the statutory pension scheme can take advantage of. This subsidy has been extended so that it is now also available for owner-occupied properties. The underlying purpose is to live rent-free in your own property when you retire.

This approach could be of interest to you if you have not yet accumulated any capital but would like to finance a property in a few years’ time. However, the Riester subsidy is only available if you actually use the property yourself. The decisive factor is when you start your pension. This means that you can rent out the property at least temporarily. You can then use your Riester pension to finance a property.

A state subsidy may sound advantageous at first. However, there are two major disadvantages. An owner-occupied property – even if it is already paid off – does not generate any regular income. You would also have to decide early on where you want to live in old age and take location, accessibility, etc. into account.

To be on the safe side, you should consider using several properties as a retirement provision, using one of them yourself and renting out the other properties so that you don’t “just” live rent-free, but can really enjoy your retirement. We can help you find suitable properties and also support you with the financing.