What About Retirement Units As An Investment?
With the growing number of baby boomers approaching retirement, more and more retirement units are being offered as investment opportunities within large retirement villages.
Do you consider such retirement units a good investment for an individual investor?
It’s a good question and one I’m asked about quite often. Just before I give you my opinion on these types of properties as investments, let’s just look “behind the scene” to see how it all works.
The reason why the developers of such retirement unit complexes sell the units rather than keep them as investments for themselves is that they want to realise their profits and recover their investment so they can develop the next building project.
For them, these complexes are not investments which they want to keep because it ties up their capital and they can make more money by developing and selling new projects.
When they develop such a retirement village they have two important objectives:
- To find a competent manager for the complex who they can sell the management rights to and
- To sell the individual units either to owner occupiers or investors as quickly as possible
Often they will sell part of the project “off the plan” because this is generally a requirement to obtain the necessary funding for the whole project.
As well as managing and operating the complex, the manager of the site will generally be responsible for maintaining a high level of occupancy by either renting the units out or re-selling those that come back onto the market.
Here’s where the problems start for you as an individual investor.
Remember that your goal as a property investor is to chase BOTH a positive cash flow AND capital growth.
These units will often show a good cash flow on paper however you need to be aware of some potential pitfalls for unwary players.
First of all there may be a requirement for you to refurbish or renovate the units at the direction of the complex manager. While this will be tax deductible for you as an investor (partially outright and partly by way of depreciation), the timing may not suit you and you will need to have the necessary funds available to meet this requirement. Remember also that the manager may stipulate how the units are to be renovated.
In other words, someone else may be telling you how you are to spend your money. (Personally I don’t like that type of deal!)
Secondly when it comes to resales, the manager wants to ensure the highest possible occupancy rate rather than the best capital gain for the investor. Even though they will earn a commission on the resale, there will generally be a formula as to how much an individual unit can be sold for because they want to move the units as quickly as possible and retain a certain price level throughout the complex.
Once again this means that someone else (other than free market forces) determines how much profit you can make from your investment.
I don’t know about you, but this doesn’t particularly appeal to me.
Lets look at the rental side of things.
In a free market, you can choose your property manager and you can decide the amount of rent you want.
In a retirement unit complex, you do not usually have a choice because the onsite manager will be the only one who can rent your property out. Remember that they would have bought the management rights to the complex at some stage, so they are not going to allow their asset to depreciate by letting other agents rent out the units in the complex.
That same property manager will also want to maintain a uniform market rental across the complex and therefore will not let you charge more for your property than is being charged for similar units in the complex.
Once again, someone has control over your investment rather than you.
In conclusion therefore, I don’t particularly like to invest in projects where I cannot influence my returns. Yes you may get a good cash flow from such retirement units, but you may not enjoy the capital gain you would on other investments and I suggest you read “the fine” print carefully and think about the implications for yourself as an investor, before you jump in.
If you’d like to share your thoughts on this topic, please click on the comments link below.
Technorati Tags: Capital Growth, Investing in Retiremement Units, positive cash flow, real estate investment, residential real estate
Warm Regards,
Hans Jakobi - Australia's Wealth Coach