I have a property worth approx $1.25M with a loan of $500K. Thoughts on a lingering market crash? If there is a bust of around 50% then I will suffer and possibly lose the property. Am I better to sell now and hang on to the cash and make other possible investments? I am 50 and plan to retire on my property profits.
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Firstly, well done on accumulating $750,000 of equity in your property, the average superannuation balance for a female at retirement (presumably 65) is just over $100k, so you are ahead of the pack.
Having all your investments in one asset class, in your case Australian Property, is putting all your eggs in one ‘basket’. This is referred to as concentration risk. If this ‘basket’ breaks then you have the potential for a large loss, conversely if property in your area booms then there is possibility to reap the rewards. Either way, you have $1,250,000 relying on a concentrated asset class. You may also experience liquidity risk, which is being unable to sell your investment at a fair price and get your money out of your asset when you want/need to.
As mentioned, given that you are planning on using these gains as your retirement profits you need to be conscious that you are working within a medium timeframe, as such you do not have as long to recover if there was a property market downturn.
As a whole, diversification of your investments into other asset classes such as Australian and international- shares, bonds, cash, infrastructure and commodities should lessen the volatility and the concentration and liquidity risks you are experiencing.
You touched on retaining funds in cash and this can definitely form part of your investment strategy. However, the amount of funds that you keep in cash is very important to get right as you don’t want to be exposed to inflation risk. This is where your cash value doesn’t keep up with inflation so it loses its purchasing power.
There is also the possibility to consider more tax effective structures and ownership for your funds, whether this is inside your superannuation, imputation bonds or otherwise; a holistic financial adviser will be able to advise you on both ownership and how to best diversify your funds.
You are in a great position to start making some awesome financial decisions to set yourself up for a financially independent retirement if you start making these choices sooner rather than later. Best of luck for your retirement.
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