Choosing a retirement property can be a daunting prospect as you need to consider location, cost, amenities, and healthcare services.
Crucially, you also need to decide what type of ownership scheme you are buying into are some of these.
The two options most commonly offered by retirement developments in South Africa are sectional title or life rights ownership.
They differ significantly on the matter of monthly costs – in terms of special levies and maintenance – as well as what happens to the unit after the owner passes on.
While sectional title ownership is also an option for home buyers of all ages, life rights are reserved for retirees buying into a life rights estate, explains Gus van der Spek, founder of Wytham Estate in Cape Town
“Retirees are usually much more aware of what’s involved in sectional title ownership than about life rights ownership, despite its increasing popularity. This has created some misconceptions around what life rights ownership actually entails.”
While both options have their pros and cons, he says life rights offer retirees “a more flexible form of ownership”. It also offers lower up-front and ongoing costs. One of the most common misconceptions around life rights ownership, he says, stems from the “incorrect idea” that it offers the same claim to the unit as someone who is renting.
“Life rights give a buyer the exclusive right to live in a unit – and enjoy security of tenure, for the rest of their life. Life right holders are entitled to the same rights they would have if they’d entered into a registered long-term property lease but, crucially, they’re not required to oversee the transfer of ownership.”
How does the life rights model work?
A life right agreement involves three parties, namely:
1. the owner, who grants the life right
2. the holder, who pays for and holds the life right
3. the occupant, being the person who lives in the property and has the right to remain there for the remainder of their life
Van der Spek says the holder and occupant of the life right is usually the same person or a couple, but occasionally the holder is a formal trust or family member who pays the life right to ensure that the occupant can live in the unit.
“A life rights contract is cancelled when either the occupant voluntarily decides to move out or passes away.”
Life rights vs sectional title ownership
Life rights differs to sectional title or freehold home ownership in that a life right occupant’s claim to the property ends upon their death. This has obvious implications for the family members and descendants who would ordinarily be tasked with managing the sale of a home when wrapping up the estate of the deceased, he says.
“If the occupant of the [property] passes away, the sale of the life right operates similarly to a house sale. The holder of the life right (if not the occupant) is paid once the life right is sold to a new holder.
“If the holder of the life right is also the deceased occupant, the money will be paid to their estate.”
If the right sells for more than the previous holder paid, Van der Spek says the holder or deceased’s estate will be paid back the full amount they invested, minus any transactional and renovation costs.
“It’s important to talk to your family before entering into life rights ownership so that they are aware of the different transfer process should you pass away. Ultimately, the life rights owner is responsible for the marketing and sale of the unit, and acts as a liaison between all parties.
“This takes a lot of pressure off of the deceased’s family and saves them the money and time that they would have spent on overseeing the sale of the home themselves.”
Life rights exit fees and levies
The final considerations that retirees should take into account, he says, are the exit fees and special levies built into most life right contracts.
“Renovation and other hidden fees may be charged in some retirement estate contracts, and vary from estate to estate.”
However, some estates choose to cap these fees after a certain period.
“They are intended to be all-inclusive and cover estate maintenance, unit refurbishment, and placement fees,” Van der Spek says, adding: “This is hugely beneficial to the occupant as they can enjoy a huge range of amenities, serviced living, and home-based care, and have no maintenance responsibilities for an all-inclusive, lower cost. It allows them to spend enjoy their golden years stress-free, as is always the goal with retirement.”
Furthermore, most retirement complexes no longer offer outright ownership, says Jason Appel, financial planner at Chartered Wealth Solutions.
“Internationally, it’s mostly life rights, but we’re still getting used to it here.”
Life rights options are also considered more budget-friendly than ownership.
“I did an exercise for my parents, comparing ownership versus life rights, and I was taken by surprise. You can generally get a life rights unit at a lower cost than outright ownership. You do pay levies, but these cover all external maintenance, security, perhaps a meal a day. And the fact that there’s a maintenance team on the property to respond quickly to any problems.”
Levies also cover care of the garden, a swimming pool – if there is one, and all communal areas.
In the example he looked at for his parents, Appel says buying a life rights property was R500,000 less than buying it outright.
“The saving of R500,000 on capital outlay should, of course, be invested. If it was placed ‘in a diversified investment strategy (targeting a return of 10% per annum), it could create an additional R2,000 of income per month while still experiencing growth.”
If this extra income is not needed every month, it will just compound in the investment portfolio.
He adds that the savings on monthly levies/rates and taxes would, of course, also result in needing less monthly income out of your current investments.
“A reduction in expense of R3,000pm would add five to six years on to the longevity of the client’s assets. The best way to improve the longevity of a retired person’s plan is to reduce their expenses, and a little goes a long way.”
If you go for life rights, however, you forgo the capital appreciation in the property’s value.
“This growth is hard to estimate as residential property valuations vary quite drastically. I would suggest that people consult their financial planners before making the decision.”
One of the main benefits of life rights, he explains, is that if you live to a really old age, and you run out of money, the village will not throw you out. Rather, the cost of your continued care is deducted from the capital amount you paid upfront.
“For example, if you paid R1.5m for a flat, and the village cares for you for an extra few years after your money runs out, after selling the unit your estate will get the R1.5m minus the care costs. There may well be other deductions too, such as a sales commission and/or an amount to refurbish the unit for the next purchaser.”
Appel says people sometimes avoid life rights because the feeling is that their heirs will lose out on that initial investment. However, personally, he would rather know his parents were being well cared for and that there was no risk of him having to put in extra money down the line.
“It really helps me knowing that’s taken care of.”
From a purely numbers point of view, it’s better to invest in a retirement village earlier rather than later.
“A person buying in at 50 or 72 gets the same value over time, so the younger person will ultimately get a better deal. However, most people are not ready to even talk about it in their 50s.”
An added consideration though, is that most places have a waiting list.
“You’ll pay a small amount to be placed on it, but if you get the call before you’re ready, you can decline and you’ll be pushed down a spot on the list. But some places have a maximum age restriction as well, or some will say you’re restricted to a smaller unit if you’re at an advanced age.
“So it is better to move in before your age becomes a problem, but only you will know at what point you are ready. And then again, the older you are, the more difficult change is,” he says.