Strategy: Selling Property on Retirement to buy shares

Discussion in 'Investment Strategy' started by Terry_w, 14th Sep, 2016.

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  1. Jack Chen

    Jack Chen Well-Known Member

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    Property is just a means to an end.

    The end being a steady, growing (faster than inflation), and tax effective (franking credits) income stream that is 100% passive. Shares that pay fully franked dividends provides all of these features.

    Calling @austing @orangestreet from the other assets subforums.
     
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes this should be considered. Not everyone can handle the pressure!
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I should point out that I don't necessarily believe in the strategy - its in embryonic form in my mind atm.

    I was just thinking about whether it would be ok from a tax point of view to wear a capital gain to invest into a higher yielding asset. It looks like you can be better off income wise.

    A guess a counter argument is capital growth. Assuming both shares and property growth is at the same percentage if you sold, paid tax, and invested you would have a lower capital amount (due to the tax) and therefore a smaller investment growing.
     
  4. Nodrog

    Nodrog Well-Known Member

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    First up what a lot of rubbish about shares in a couple of the posts here. Based on fear and lack of knowledge.

    @CatCafe, I'm not sure it is worth the effort adding anything here. I've discussed all this and much more in other threads and the last I heard @Terry_w was choosing not to read anymore of this:

    Financial planners and index funds

    All I can suggest is to take any change in baby steps until confidence and ability to deal with volatility increases. Christ I'm a conservative, nervous nelly but learnt to deal with sharemarket volatility. IPs are what stressed the hell out of me at times. I've harped on endlessly about investing in shares / LICs for income. Best way to overcome fear of volatility is to focus on the income from dividend oriented LICs or even a market cap index ETF rather than price volatility. A single company can go bust but well diversified portfolios (eg older LICs) generally don't.

    Perhaps read the Peter Thornhill thread and links there multiple times until the switch goes on.

    But if all this fails and SANF is going to suffer then perhaps forget about it and stick with IPs.
     
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  5. Nodrog

    Nodrog Well-Known Member

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    Just looking back at the old above post of yours any wonder you're worried about share volatility if following the Boglehead approach. Only way you're going to be able to retire on that is by having to progressively sell off your assets. I'd be crapping myself too with very poor SANF if my retirement plans were dependent on that approach.

    As a nervous nelly the only way I could deal with being entirely invested in shares (sold all the IPs) was by investing in shares / LICs that produced a growing income stream. If every company in the older LICs stopped paying dividends for more than a year or two I would suggest that you will be worried about much more than your IPs or shares.

    For me passive Income, income, income = great SANF!
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not sure i understand what you mean austing.

    What if one just invested in vas and vhy for instance. Index funds. These would be very stable and provide a good SANF woudlnt they?
     
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  7. radson

    radson Well-Known Member

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    Ok I give up

    SANF?

    South African Night flight
    Synthetic aural neural flocculant
    Sulawesian anterior nocturnal flamingo
     
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  8. 158

    158 Well-Known Member

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    Sleep At Night Factor.

    pinkboy
     
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  9. Nodrog

    Nodrog Well-Known Member

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    Sleep at night factor:)
     
  10. radson

    radson Well-Known Member

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    oh...thanks...shame it wasn't something about a flamingo :p
     
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  11. Chrispy

    Chrispy Well-Known Member

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    Terry ...That is exactly what I did with some of my properties. The CGT is a killer, particularly if you mis time and sell more than one in a year. It happened because a purchaser extended the contract!!
    I am down to 5 properties with some shares and cash. As the cash deteriorates I will sell another property and convert to more shares. The dividend is far higher than rents or interest!!! Having both means I get the appreciation from property with ready cash plus income from the share dividends and the rents. Plus getting a tax refund from the franking credits. It works for me.
     
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  12. Nodrog

    Nodrog Well-Known Member

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    Yes, although I like to spread my money across Mgrs with a greater focus on Industrial shares. Resources are volatile cyclical beasts with a poor and unreliable dividend history. In VAS you can't avoid these.

    Your older post said you were going to focus on the Boglehead method of investing. Boglehead typical 3 fund portfolio = local shares index fund + International Shares Index fund + Bond index fund.

    YES to VAS. NO to VHY for reasons discussed numerous times here despite the dividend focus. Eg smart beta issues with turnover and rubbish constituents due to set rules. NO to VAF and overseas index funds due to crap income.

    In other words something diversified with a low fee that pumps out a generous and reliable dividend income stream. And with the free kick of franking. VAS or better still well selected LICs. LICs can smooth dividends as opposed to erratic dividends from VAS. VAF and VGS (or VTS / VEU) if a major part of the portfolio just ain't gonna do it!

    Man oh man I can hear the Bogleheads call to arms already.

    It's all been discussed to death in some of the other assets threads.
     
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  13. RiMo

    RiMo Well-Known Member

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    This has always been on my mind lately.

    We are heavily invested in properties. Our IPs are basically paid off (all offsets are brimming to the full), we have rental incomes sufficient for early retirement if we chose to (we're only in our 40's), but I'd love to look at other options in the future. ATM, the yields are still pretty good (no loan repayments you see!) but as Terry has mentioned, yields and deductions decrease over time. There will come a time when we have to look at our properfolio and see if the numbers still stack up when it comes to tax, running/holding expenses, and transaction costs. These are the 3 biggies for us.

    I think the answers lies in being open to new ideas/strategies and look at several different options for diversification. Everyone is different: risk profiles/aversion, age, family/work situations, end goals, etc. We just have to figure out what would be the best mix for each individual. Maybe ratios for shares/properties/cash can be 20/70/10 or 50/30/20 or whatever depending on where you are in life.
     
  14. Finrod

    Finrod Active Member

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    Good post.

    Another issue is: by selling the property, you've lost the leverage element and are thus not growing your capital on the same amount of assets. 5% growth on $1m of property is greater than about 8% growth on shares. I suppose this is a form of opportunity cost?

    Mitigating action: Take a margin loan of $200k against your $600k of shares and have the dividends from this $200k re-invested into either paying down the loan, or buying more shares. This you benefit from growth of $800k of shares which is better than just $600k, and arguably close to the $1M of original property.
     
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  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yes this is the downside

    $1mil property growing at 5% is $50,000 pa in year 1 for example.

    But if you sell the property and buy $600,000 worth of shares your shares growing at 5% would only generate $30,000 capital growth in year 1.

    (ignoring income for the moment).

    For the shares to grow at $50,000 in year one they would have to grow by 8.3%.

    Margin loans scare me - even at 33% LVR. But some will consider these.

    Thanks for pointing this out.
     
  16. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Actually I am not really a bogglehead. I would never invest in bonds, would invest in the international index fund (but don't yet) and do invest in VAS and VHY.

    Now I am inclined to just go for VAS due to the higher franking credits.
     
  17. Mumbai

    Mumbai Well-Known Member

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    @Terry_w is the post catered more towards investing in shares by selling property when closer to retirement or does it make sense normally as well?
    Scenario- Post APRA the serviceability has taken a hit and even if I could service and get some loan, I am not able to find a cf property. Hence, i decided to build a granny flat in one if the IPs. Build cost -120k and rent will be around 370pw.
    So, am I better off using the 120k to buy shares (ETFs/Lics) or continue with the granny flat build?
    I understand that I need to figure out what I have to do. But, if you were in my situation what would you do?
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Lets do the maths

    Granny Flat
    $370 x 52 = $19,240 per year.
    That is like earning 16% return.
    Plus it is tax effective as you will be able to depreciate the building and fittings. It will also add value to the property.

    Shares
    Say a generous 7% yield including franking credits
    $120,000 x 7% = $8,400 per year
    Not toilets to fix, no land tax, no problems to worry about
     
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  19. Dean Collins

    Dean Collins Well-Known Member

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    Yep I've seen from my own personal observations that now is the wrong time to be buying and the time to buy is right AFTER the GFC.

    Its crazy how fast the return has happened.

    I think that the difference Terry is that once you buy shares you have to actively monitor.....for me I know the apartments we have in Sydney are there and pretty much apart from catching fire/nuclear bomb in Sydney/Massive layoffs and unemployment in Sydney......their value is going to be relative stable.

    Cant say that for stocks eg Mylan this week etc.

    There has to be a value associated with that risk/monitoring........ (that said when you're retired....probably have more time to monitor).
     
  20. Ed Barton

    Ed Barton Well-Known Member

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    Does anyone else use a full service stock broker?