With a significant decrease in defined benefit schemes and more emphasis being placed on defined contributions as pension provisions, the responsibility for investing for the future is increasingly shifting from the employer to the employee. Taking responsibility for how your pension contributions are invested can be daunting and require significant research and investigation.
An alternative investment many are choosing to take is in real estate. As the economy starts to pick up, some feel this the right time to be venturing into investment property. Instead of making employee contributions to pension schemes or squirrelling money away in savings, it could be worth considering channelling that money into a second property. Better still, diversifying your risk by both investing in real estate as well as contributing to a pension may be an attractive solution for your future.
Signs of Recovery
Living as we do in the aftermath of a housing market decline, it pays to be weary when investing in real estate. However, while some investors are still shy of venturing back into real estate, now could be an attractive time to invest. According to the Wall Street Journal last week, the housing market is showing signs of improvement and the S&P/Shiller Home Price Index showed that on a national scale, prices had returned to their early 2003 levels, so perhaps now is the time to buy while prices are still relatively low.
You Can't Live in a Pension
It may sound obvious, but you can live in a property. Choosing to invest by buying, for example, a rental apartment which is lower in value than your own home gives you options should your personal financial circumstances change for the worse at some time in the future. If monthly mortgage payments on the apartment are lower than the payments on your own home, then if times were really difficult, you have the choice of selling your home and moving into the apartment, thus freeing up any equity from your former home and reducing your monthly outgoings. This isn't why you invest in a second property as a pension provision; but it can certainly add to your peace of mind.
Keep it Local
If you have lived somewhere for a considerable time, the chances are you know more about your local property market than you may realise. In addition to an awareness of sale prices, you are likely to know about transport links, schools and businesses in the area; all important factors in investing in a good rental property. This knowledge is what could give real estate the edge over other forms of investment for your pension: you may well feel more confident investing in what you know.
Holiday Home Pension
Becoming a landlord isn't the only way to use property to provide for your future. If you are fortunate enough to be able to afford a holiday home, you have all the same benefits that come with the choice of selling to realise appreciation in price or leasing – perhaps to holiday makers – to take an income, but with the added advantage of being able to holiday there yourself and enjoy your investment in the interim. However, if contemplating a holiday home overseas, be especially diligent in your research and consider local taxes, bureaucracy and exposure to interest rate fluctuations; all of which will have a bearing on the success of your investment.
Financing an Investment Property
With the Fed's apparent commitment to keeping mortgage rates low and quantitative easing efforts focused solely on mortgage-linked debt; more affordable loans could make purchasing real estate as a pension provision more appealing. Although lenders have been more cautious in recent years, lending is starting to increase and if you have a sizeable down-payment this will work in your favour in attracting competitive interest rates. It may be worth considering fixed rate mortgages now when interest rates are at record lows to ensure you can accurately forecast the return on your investment. With property taxes open to increases, fixing your mortgage could mean one less thing to worry about.
Before approaching a lender for an investment property mortgage, discovering your credit score can give you a heads up on how your circumstances will be viewed and therefore what your options might be. When looking into financing a property investment, care should be taken to ensure that mortgage payments could be met during times of vacancy to avoid getting yourself into an undesirable situation.
Property as a Long Term Investment
Regardless of when you buy, if you decide to invest in real estate as a pension provision, the long view should be taken. One advantage of investing in property is that, assuming you meet the mortgage payments and pay the mortgage in full by the time you reach retirement age, you have the flexibility of taking an income from the property or selling if market conditions are favourable and reinvesting that lump sum elsewhere. It is the potential for appreciation over the long term in addition to the monthly income that can make such investment an attractive prospect.