Should I sell my shares to buy a PPOR?

I have had a rentvest strategy for many years now, which until the last couple of years mostly involved investing in shares. It suited me because I don't have any family to support and I liked the idea of the flexibility of renting. I enjoy the freedom of knowing I can move relatively easily if some idiot moves in next door. With the stupid prices in Sydney, this also makes sense. However, I have just scored a new job and will be moving to Melbourne. This potentially changes things as apartments in Melbourne are incredibly affordable compared to Sydney, thanks to the supply. I'm now wondering whether it would make financial sense to change my strategy. I understand a lot of the answer will depend on unknown variables, such as the performance of both share and property markets.

I have 2 IPs in Adelaide and Brissy at around 88% LVR, approx $100k currently in an international managed share fund, and $250k in Australian direct shares. For my Aussie shares I mostly invest in good dividend payers. Last year I earned a bit over $10k in dividends all up. Would it be a sensible strategy to look at liquidating my shares and buying a PPOR apartment in Melb in another year or two? I have had a look at some of the inner-city apartments and I could purchase something really nice with 2 beds potentially for under $700k. Or would I be better off keeping my shares and continuing to rentvest (and possibly borrowing against the PPOR equity to buy back into a smaller amount of shares)? Love to hear your thoughts.

PS I have a skill of buying the wrong asset class at the top of that particular market, so this suggests property is about to fall while shares boom

 

If rentvesting has been working for you so far, I don't understand why a move to Melbourne would change so much as to change your strategy.

If anything, the yields in Melbourne are even worse, so you should be even further ahead. Especially if you want to live in an apartment.

 

Hi thatbum. I think it's partly because I see myself setting up a permanent home in Melbourne and building my future from there, and partly because Melbourne apartments have been in the doldrums, whereas Sydney is nuts. I feel like there could be value there. From one of the areas I've been looking at, Richmond, the yields don't appear too terrible, based on the sale prices I can see.

 

A main residence is the only CGT free asset you can have (that might appreciate) so not having one is putting you at a disadvantage.

If you sold your shares and purchased a property you could borrow against the property to buy the same or similar shares back again with the interest now being deductible.

But you won't get to the same amount again because of CGT and the 20% tied up in the property.

 

Woohoo, I was hoping to hear from you Terry! You were one of the people I had in mind as I was writing the post

If I decided to go down this route, it probably wouldn't be for another year or two, and I would probably still take out a smaller loan to get me to a figure closer to $700k. I could keep my investment in the shares in the meantime, but then there is always the risk of a large market downturn.

 

There's always the risk of a large market downturn. Just like there's always a risk you'll get hit by a bus.

Life is full of risks. Fortune favours the brave.

 

I suppose I'm thinking about the numerous financial commentators I've read over the years who suggest steering clear of shares if you are saving for a PPOR, due to the risk of a downturn right when you're looking to access the funds.

 

If that is a concern, then you could sell down some shares to hold in a Term Deposit while selecting the perfect apartment for you. Given the likelihood that apartment prices in Melbourne would remain similar to today in the short term, then you would have an amount to use for the cash deposit while the other shares hold a potentially higher probability of increasing in value at a higher rate than the price of your apartment.

Should you find an apartment that you like to live in, then it is ok to go ahead and purchase it. As populations increase, there is every likelihood that apartments will grow in value in the longer term in Melbourne and Brisbane.

 

You are taking that advice out of context.

That advice is correctly directed at those looking for ways to save a deposit, with the intention of buying a PPOR within a few years, and the share market is not recommended due to the short time frame.

You already own the shares so your situation is entirely different. Your choice is between retaining the shares, or cashing them in for a PPOR deposit.
Marg

 

Thanks Marg4000. Yes, you're right of course, and I actually had that thought in the back of my mind as I was writing it. Considering the reasonable dividend yield I receive too, it is probably more sensible for me to retain my shares until I am ready to buy a PPOR, as the income can go towards increasing my deposit. Money in the bank won't go far at the moment.

 

If you are going to do it then selling after the property is settled and the loan in place may be the way to go. You can then pay down the loan and reborrow - just plan the splits ahead.

 

The same could be said for retirement....

 

Yes, it is the state of the unit market in Melbourne that makes me think time is on my side. I was looking at some of the inner suburbs I like and prices for units have actually gone slightly backwards, while houses have boomed. I'm assuming that's unlikely to change over the next couple of years with the amount of supply and restrictions on investors.

I've also been thinking about selling down a portion of shares, as you suggested, at least to put my mind at ease. But I'm not sure about that -- I might hold on to the lot until I get closer to PPOR decision. It's up in the air at the moment.

 

Thinking differently here....

If you're thinking apartments.....you can use your shares to get a 2br for 350-400k...

The 10kpa in dividends you lose could be more than made up for by the 20kpa in rent you would normally be paying?

Thinking out loud here....and i'm not so experienced so someone please chime in here if I've got it wrong?

The money you're now not paying on rent could be put back into shares?

Potentially crap CG but maybe that would be offset by the fact that you're not paying any non-deductible interest, Wouldn't need a car etc....

 

Yep you're right hammer, although owning an apartment comes with lots of other costs too such as strata, rates, maintenance etc. An option could be, as you suggested, to sell all the shares, buy the unit, then gradually build up a share portfolio again over time. The other option is to borrow against the equity to invest back into shares, meaning I wouldn't lose my exposure to the market.

On that note, @Terry_w do you like the strategy of using home equity to gear into shares? Obviously the rates would be better than a margin loan. Is there a quick calculation I can do to work out the after tax position of this strategy, once deductible interest and franking credits are taken into account?