Retirement advice - sell IP's and what to do with proceeds?

Hi,

I'm after some general thoughts on what others would do in this situation when retiring.

My parents are retired now and live off the rent of 2 IP's in Melbourne. One is commercial/residential premises in outer suburbs used as a milk bar yielding 30K per year, approx 5-6% yield after costs. The other is a recently purchased (without advice) 2 bed apartment in a middle suburb/high rise yielding about 20K or 3-4% after costs. No debt on either.

They are considering selling one or both and reallocating the proceeds. The commercial will have a bit of CGT being held 20-30 years.

What would others do in this situation if selling with the proceeds as a passive income focused investment? Would you just put it all into Super? And/or some low cost LIC's? (I hold AFIC and ARGO so might be biased)

Thanks

 

Suggesting they invest in shares would be financial advice.

They should perhaps see a financial planner and seek advice on shares and super.

Is the commercial property preCGT?

Why do they want to sell?

 

Commercial is post GFC. Some reasons for considering include some big repairs coming up, losing hassle of being landlords, and the apartment being low yielding. Just curious myself how others might invest approx 1 mil when retiring for themselves but understand if people think this constitutes financial advice. Personally I think I'd be happy split between super, afic and Argo

 

Keep in mind, super is a ownership structure not an investment.

 

Sorry meant post CGT for commercial. Yep by super referring to standard fund just to also have some non equities exposure. Guess super caps would limit amount placed there

 

Yep... shares. Long running LICs...

 

I agree. Super and old school LICs. I would be guessing that they would be too old to want to run an SMSF so an industry fund would be the go. You could even purchase the LICs in the super if it has the facility e.g. Australian Super Member Direct option.

I would think about seeing a financial advisor though. They are your folks and we are not all gun investors nor financial planners. Advice would be tax deductible also.

 

Thanks for the tips. Yes maybe a chat with their accountant and a financial advisor might be a good place to start and might help a bit with some of their fears/understanding of the sharemarket.

I think I sparked their interest when mentioning the idea of receiving around 6% rather than 3% which would make a big difference to their lives, but I know they have to be able to sleep at night

 

Strategy: Selling Property on Retirement to buy shares Strategy: Selling Property on Retirement to buy shares

 

Lots of talk around here about selling IP's and using proceeds to buy shares via LIC's and ETF's etc but I think it's a huge risk to put so much capital into something you have no control over. It's very possible to lose 40%+ in stocks as we've all seen with the GFC and black swans.

Property is generally bullet proof if you bought something well located which has high demand. Worst case scenario it burns down but you've got insurance and the land is still there. At your parents age they should be focusing more on capital preservation. I personally wouldn't put more than 30-40% of my wealth in stocks.

 

With the shares just look at the dividends. The dividends rarely get cut... you'd want a largish basket of different shares though, don't just invest in a handful. Which is where the LICs come into play.

 

Seek out an FP who is used to dealing with high wealth individuals not your run of the mill advisor who plays with mum and dad retirees.

They will have exposure to unlisted vehicles as well as wholesale funds (not retail funds).

 

I have asked this question before numerous times and I will ask you the same.
Please post details of your example of a historical, long term LIC which "lost" 40%+ during the GFC.
He is a clue from our good friend Mr/Ms Dictionary:
Adjective
1.no longer possessed or retained.

 

I am not a FP so I can't give you financial advice. Be very careful about posting a little bit of information on PC and asking members what they would do.

IMHO, there is a lot of information that you have not provided us (which a good FP should ask for) including but not limited to:

1. How old are they?
2. How is their health?
3. What are their goals in retirement?
4. What is the budget for non-discretionary expenses (food, insurance, ...)?
5. What is the budget for discretionary expenses (travel, entertainment, ...)?
6. Are there any expected expenses in the foreseeable future (new car, wedding, ...)?
7. What is their risk profile?
8. What insurance do they have? Are they missing some? Can they cancel some?
9. Do they own their PPOR?
10. Are they thinking of downsizing? If so, when?
11. Beside the two IPs, Do they have any other capital assets?
12. How much do the have invested in cash?
13. How much do they need as a cash buffer to cover the unexpected?
14. Besides the rent from the IPs, Do they receive any other income? If so, from where and how much?
15. Do they pay in tax? If so, how much? Can their affairs be re-structured to optimise their tax payments?
16. ...

From my experience, a lot of FP favour shares and not property. Your parents really need to find one who believes in all asset classes. Also, ask for multiple options (do nothing, sell one IP, sell other IP, sell both IP's, ...) with resulting outcomes. Make sure you critic their assumptions.

I am not convinced that selling two IP's, destroying some of your parents net worth (with selling costs, CGT, etc) and investing in shares is the way to go.

As stated above, way too much information is missing.

 

True... and my response below is a fitting answer to the question posed. I'll assume the OP's parents don't need to/don't want to leverage if they convert the two properties into shares (sell one in one financial year, the other in another) if I work with the assumption they have a decent capital base. LICs can definitely be a good strategy.
Btw, the use of some leverage is ok but I wouldn't go overboard.

Note: I'm not licensed to give financial advice.

 

What if they were the type that sold and invested in shares with the shares dropping, they panic and sell at the botton just before the shares increase again.

I had a client who basically met a stranger who was a share investor, gave that person access to invest $1mil in the share market. The shares dropped to $600k, my client retook control. Sold all the shares just before they jumped back to $1.2mil

 

AFIC, not quite 40%. We bought some early 2009:



In hindsight it was a good entry point.





However if we had made a really large purchase a few months earlier the result 8 years later would have been considerably different. Yes the dividends are great but the loss of capital can take years to recover from.

 

Can happen... people are irrational. They need to go see Peter Thornhill. Buy on the falls....

Long term, the stock market keeps going up... solid industrial companies keep performing....

I'd also say there's a lot less margin lending for shares after the GFC, so there will be a lot less forced selling causing huge drops. Maybe in another 10 years the GFC will be a "distant memory" so people will be less cautious. But I think responsible lenders won't act like they previously did. Banking reforms....