Strategy: Selling Property on Retirement to buy shares

I was also perplexed at this so I slept on it and then it came to me

What a fascinating thread and has certainly got me thinking along different lines but will proceed with patience as knowledge gaps in this area need to be filled.

 

This problem doesnt occur with efts and lics

 

How about a strategy re: selling IP's (all or some, i.e deleveraging) before retirement

 

South Australian Ninjitsu Federation

 

There's a strategy that provides for all these situations, simultaneoulsy. ie properties that provide fully franked dividends, while also allowing you to utilise 105% leverage with debt facilities that are never at call. It's called NRAS

 

I'm considering doing something similar but rather than sell IP's, I intend to sell my "lifestyle property" down the track to generate additional cashflow to fund what I anticipate will be rising living costs (healthcare, more frequent travel etc...).


I'm enjoying reading all the LIC talk... they fit my investing profile perfectly. Don't have them yet (just ordinary shares so far), but that'll change before too long. I don't view ETF's in the same light though.

 

Only if you measure yields against current value. Which is BS, and another furphy perpetuated on the forum all too often. Your investment was at a fixed price - ie the original asset price. If rents increase, your return on that price - ie your yield- is increasing.

 

But I can remember the last time BHP took a bath and cut the dividend viciously.

 

Why is it BS?

Say you bought a $100,000 that rented for $200 pw - approx 10% yield

After a while the value rockets up to $500,000 but the rent is just $250 pw - approx 2.6% yield on current value but 10% of purchase price.

If you measure the yield against current value you can see that if you sold and reinvested the proceeds, after paying tax is need be, you could double or triple your income.

 

It's BS in the way most on the forum describe it, because the yield hasn't diminished on the initial investment of 100K. And in the example cited, only 100K has been invested, not 500K. Even when the value grows to 500K, unless I have drawn further equity down, I have still only used 100K of debt , and if the return on that 100K has increased from 200 per week to 250 per week, I'm getting 13% yield on my 100K investment rather than 10.4%. I agree I'm not getting 13% yield against the improved 500K asset value, but inefficient use of equity is another conversation entirely return on equity and return on investment need to be better distinguished when discussing these things.

All I'm saying is that a generic comment like "yields diminish over time" is not strictly accurate, because strictly speaking the yield from my 100K initial investment has not diminished in the example above.

 

I prefer to calculate it based on current value as can then determine whether it is effecient use of capital.

 

Exactly. Often referred to as lazy money. No one is saying the original investment is no longer good. To the contrary, it was so good, but now remeasured the opportunity cost has changed. Time to sell and re deploy where the new fundamentals are better. Of course this has to be considered post tax and selling costs, but if it makes more sense to move on, then why wouldn't you.

 

Developments have been great for you, reading your posts about the Melb market, as well as O/S investing (no devel o/s though?). Would you not look into some shares as a place to park some funds as oh **** money should you need some cash quicker than you could sell a property. (I realise this question has just derailed the thread as its about deleveraging into shares as a cashflow stream, but those shares could then be used as a basis for the retirement income, if chosen well).

I'm taking more of an interest in shares to back up my properties to provide a totally independent investment vehicle, and also because they can be turned around faster. Just need to read and learn, as I have about property, and overcome a fear about the relative volatility of shares compared to property.

 

@Terry_w
Do you factor in selling costs etc when doing this if looking to sell and reallocate Capital?

 

BHP don't call with Bad news, but you do get advised

BHP's profit will be hit by at least another $400 million in redundancy costs and writedowns

BHP vs. AORD

 

NRAS is good but only as long as it lasts. Ten short years and it could be gone even before you retire.

 

Yes - like in the first post.

 

And paying well above NTA for the privilege.

 

Respectfully disagree, assuming appropriate due diligence is used. I have multiple NRAS properties, and if one is discerning in selection, this need not pose a problem.

 

At which time , if you have dividend reinvested the surplus annually towards debt reduction , the property reverts to full market rent and comfortably stays CF+ on its own in the post NRAS years. AND, you have significant equity and borrowing capacity because of the debt reduction, with which you can continue to invest for income.