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Strategy: Selling Property on Retirement to buy shares

Discussion in 'General Property Chat' started by Terry_w, 14th Sep, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Strategy: Selling Property on Retirement to buy shares

    I’ve pondered over this for years – mentally wrestled over whether to invest in shares or in property. These days I think the general way to go is to initially invest in property for leverage and then once you have made good gains and the leverage has become low you could sell and buy shares.


    Yes you could potentially leverage off that property and buy more property. But the fact remains that only the original loan is deductible against that property. Property is only a good investment if it is highly leveraged.


    The below assumes the PPOR loan is fully paid off (no non-deductible debt). If there was undeductible debt you would use the proceeds to pay this down and then borrow to buy the shares.


    Property assumptions

    Purchase for $300,000

    Value at retirement $1 million

    Rental Yield 3% = $30,000 pa

    Interest only loan of $240,000 at 4% = $9,600

    Holding costs of 25% (agents fees, rates etc) = $7,500

    Total costs = $9,600 + $7,500 = $17,100

    Pre Tax Cashflow = income – expenses = $30,000 – 17,100 = $12,900


    The rental yield was 5% when purchased but over the years rents don’t go up as fast as inflation.


    Capital Gains Tax

    If this property is sold the capital gain would be about $650,000.

    The 50% CGT discount would apply so the taxable gain would be $325,000

    The tax payable on this would be

    Assuming other income of $50,000 = $153,382

    Assuming no other income = $128,882

    So lets assume you pay $150,000 in tax.


    Cash left over after sale

    The loan must be paid out and the CGT paid

    $1mil - $240,000 - $150,000 = $610,000

    You would be left with about $620,000 in cash after paying out the loan. You also have some expenses such as conveyancing and agents commission so say $600,000


    If you invested this $600,000 in shares paying around 7% in dividends that would give you $44,100 in income per year.


    Lets say you only receive 5%, that would give an annual dividend payment of $30,500 per year.


    VAS for example has paid $2.9238 per share over the last 12 months. Yesterday’s close was $67.22 so that is a dividend yield of 4.35% before taking into account franking credits.

    WBC is trading at $28.70 with a dividend yield of 6.60% fully franked.


    Random Points to consider

    · Thus selling a property like the example could quickly double your income.

    · Shares can and will drop. But the dividends paid out do not fluctuate as widely as the share price.

    · You could buy dud shares and completely lose your money. But this risk could be eliminated by buying some sort of index fund.

    · You do pay CGT on the sale of the property but keep in mind this is not extra tax, but tax that would have, probably, eventually been payable anyway – if you sold or if the beneficiaries under your will sold. An unsold investment property is pregnant with CGT.

    · The shares will have a higher cost base.

    · If you need a bit of extra money you can easily sell down some shares – can’t do this with property.

    · You can time the purchase of shares so that you buy in a dip and sell during a high.

    · You can renovate and improve a property but you cannot with shares.

    · Generally as a whole shares perform slightly better than property in terms of capital growth.

    · Yields of property decrease over time

    · Repairs on properties generally increase as they age.

    · Land tax gradually increases on property

    · Non cash costs such as depreciation claims gradually diminish over time with property

    · There is no stamp duty on the transfer of shares (I think none in any state) so you can easily restructure when needed by changing ownership.

    · In retirement mode you need income more than growth. But you will want growth too so that your income increases with (or faster than) inflation.

    · There are also many strategies that can be used to reduce the CGT on the sale of an investment property – so you will end up with even more shares paying dividends.

    Don’t buy shares without getting some financial advice.

    And get some tax advice before you attempt to sell a property.

    Get some credit advice as well if you have loans that relate to other properties secured by the property you are going to sell.

    Please feel free to critique my strategy, point out errors, incorrect maths or generally disagree with it. It is not a thorough analysis, just something I typed up in 10min
     
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  2. MTR

    MTR Well-Known Member Premium Member

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    Thanks for sharing.

    I have pondered over this as well many times.

    The only issue I see is if you buying shares for income that makes sense, but your money is tied up, its not working for you?? Nothing wrong with this.

    What if you can generate greater income by using the cash from the sale of property then which is better?
    More work, but greater reward.

    MTR:)
     
  3. mcarthur

    mcarthur Well-Known Member

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    I'll take longer to digest it all, but that is a great quotable saying!
     
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  4. Ed Barton

    Ed Barton Well-Known Member

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    It's hardly tied up. Shares can be sold and settled in a few days. Money in property is far more tied up.

    I think you are developer, perhaps that's what you mean by working for you. This is from a passive investor perspective.

    Once again I think you are coming from a development perspective. If you can generate greater returns go for it. But think of the risk.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yeah - you would just choose which one you think can make you more money. If you are developing the profits may be more than investing the same amount into shares.
     
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  6. See Change

    See Change Timing Lord Premium Member

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    I personally observed numerous people who's retirement plans were , put on hold to completely FUBAR by exposure to shares as a result of the GFC .

    Just something to think about .

    Cliff
     
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  7. S1mon

    S1mon Well-Known Member

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    Good stuff. Maybe some after tax numbers? Franking makes a big diff
     
  8. Ed Barton

    Ed Barton Well-Known Member

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    Interesting. Were they intending to eat the capital? That can create problems with share investing. Or were they invested in speculative shares? Were they equivalent of mining town property investors?

    As Terry said dividends on a share portfolio don't fluctuate wildly over a basket. So if you're only relying on dividends you shouldn't be fubar'ed.
     
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  9. Ghoti

    Ghoti Well-Known Member

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    Yep, friends have their in-laws living with them courtesy of GFC in the months following retirement :(

    A bitter pill watching years of super disappear in the share market abyss. Seems their 'advisors' were not as smart as they should have been.
     
  10. The Falcon

    The Falcon Well-Known Member

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    No doubt they were exposed to "products" and not stocks ;)
     
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  11. See Change

    See Change Timing Lord Premium Member

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    My observation is that it takes around 7 years for large segments of the community to forget the pain and suffering associated with negative events such as the GFC , which means around about now ( unless you were personally impacted ) people will be forgetting the massive impact that the GFC had on wide segments of the community , including people who were following the advice of conservative advisors .

    Rationalise and excuse it away as much as you want to .

    It happened .

    Cliff
     
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  12. MTR

    MTR Well-Known Member Premium Member

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    When I say tied up, what I mean is if you are dependent on the income from shares for retirement then selling may not be an option you would want to consider, it becomes a mindset, I know this one well:)
     
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  13. MTR

    MTR Well-Known Member Premium Member

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    Some of us ignored GFC and made money, dumb luck perhaps??
     
    Last edited: 14th Sep, 2016
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  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If a person was owning shares preGFC and held onto those shares they probably would still be better off. Their income from the shares would have dropped slightly during this period and not as much as the value.

    People get into trouble when they panic and sell at the lowest point. Put their money into cash and then watch as shares rise faster than before and get back where they were - where some will rebuy, only to sell when it drops again!
     
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  15. MTR

    MTR Well-Known Member Premium Member

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    I agree to a point, however you can not assume that investors can hold in bad or good times.... because life happens and circumstances change, there are many variables, ie can no longer afford to hold, interest rate rises, health issues, divorce, job losses etc etc.
     
  16. turk

    turk Well-Known Member

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    Agree, but the same applies to property.
     
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  17. Perthguy

    Perthguy Well-Known Member

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    @Terry_w I have been thinking about a double property/shares type strategy that involves at least one unencumbered IP. Lets use Vanguard as an example.

    I have an unencumbered IP worth $500,000 and I take out an investment loan at 80% LVR using the IP as security. I use the $400,000 I have borrowed to by Vanguard.

    Upsides:
    Rent from the IP
    Capital growth from the IP
    Income from Vanguard
    Capital growth from Vanguard
    Interest is tax deductible

    Downsides:
    Rates, insurance, taxes on IP
    Vacancies
    Interest will eat into cashflow
    CGT when selling

    I haven't modelled this because if I head down this path it will be years away.

    Just wondering if it is worth considering?
     
  18. The Y-man

    The Y-man Moderator Staff Member

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    @Terry_w

    Not sure if I should comment here - could be seen as ramping some stuff I hold!

    But here goes.

    For me, I like to hold my IP's for CG.

    I could pay them off and try to live off the rent - but that takes a lot of capital for a relatively low cashflow (to live off) ~ about 4% average for me - barely better than trying to live off the interest on a term deposit.

    But instead of paying off the IP's, I figured as long as I could invest the money to yield more than the interest rate on my IP loans, I'd be right (another way to do it would be to draw down on equity).

    I had my fair share (ok - it was a bloody big chunk) of losses in the GFC.

    Looking back though, my losses were in the areas of:
    - Structured products (aimed 100% leveraged capital gains)
    - Trees (yeah yeah I know I know) for captial gains
    - Shares I had for trading for capital gains

    They all had one thing in common - they were aimed at capital gains.

    Interestingly, there was one share* I did hold through the GFC, and bought more of when I got some money - because I bought it for the thing you mention - yield.

    * it is actually a CPT (AREIT)

    But there are dangers - and you have touched on - is the dividend (or distribution) stability.

    An event like the GFC or much more recently the collapse of ore and coal prices can and will affect the dividends of companies involved (big time).

    So I figure the trick is to find industries that are not that heavily affected, and still yield me more than my IP interest rates (I use 6% yield as the required minimum).

    I went to div com au that someone here (or on Somersoft) kindly pointed out and went through each security yielidng more than 6% asking "how stable is the income for this company, given an event like the GFC, or China slowing down, etc etc"

    I ended up with a list of CPTs (sorry for the purists - I still call them CPTs) with large(ish) portfolios, with either government or big companies (typically listed) as tenants, and leases that weren't all going to end at the same time.

    My thinking is this (and please do correct me if this assumption is rubbish):
    As long as a tenant doesn't go bust, you'd keep collecting rent until the end of lease.
    If there's a diverse or big portfolio of properties, with such tenants, chances of having everything empty in one hit is low AS LONG AS THE LEASES OF ANCHOR TENANTS DON"T EXPIRE AT THE SAME TIME in all the properties.
    Of course the managing company also needs to stay in business, and we need to assume they don't do any dodgies (a la Centro)

    So instead of paying off my IPs, I stuck the money into these trusts.

    Some observations:

    I bought into some big names earlier this year and last yielding 6%+ Interestingly, the prices on these rose more than what I would have got holding them for a year in a matter of months.
    So then the question was: Do I keep holdoing these for the 6%+ yield, or just take the profit and buy another security giving me the the same yield (but more of them). Couldn't help it - of course I sold and used the increased capital base to buy another security.

    Over the course of the last 3 years of playing around with this, I have found many of the securities yielding 6%+ don't stay that way for long - the market seems to realise the value and the prices go up.

    The plan above is certanly not without risks.

    1. Have I simulated a similar portfolio through the GFC? *NO* (hope someone can sit down and do so)
    2. Interest rate rises will impact yield (example where a CPT has borrowings - and most do)

    Countermeasures:
    1. Buy securities where there is some serious underlying asset with value - like huge blocks of land in Sydney or Melbourne
    2. Watch the long term fixed interet rates banks are offering
    3. Hold some securities that may not be affected or benefit from interest rate moves

    On point 3, like you @Terry_w I found in June that the Big 4 - particularly one of them - was yielding 8%+

    I looked at their financials to make sure they could afford to pay such dividends and still retian enough working capital, and figured it was a business that wasn't going to go bust any time soon. So I bought some. Within 2 months, the price went up 10%+ (I think) and I sold. Interestingly, today, they are back at 7.5% yield.

    Summarising, my strategy now is "worst case I'll hold for x% yield, best case I'll make a short term gain and take some profit"


    The Y-man
     
  19. MTR

    MTR Well-Known Member Premium Member

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    of course.:)
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That is similar to this:
    Strategy for Share investors involving Property https://propertychat.com.au/community/threads/strategy-for-share-investors-involving-property.11476/

    Good if you can still qualify for finance I think.
     
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