Strategy: Selling Property on Retirement to buy shares

The yields from most residential property are very low compared to the yields from shares. Shares are low or no maintenance. Property isn't. Property is a lumpy asset. Shares aren't, you can sell small parcels and have money in your account in just a few days.
You may end up exceeding land tax thresholds with property. What happens if you decide to move overseas and the government decides to whack on a extra tax on non resident owners because you're an easy target?

Just some food for thought from the other side of that coin....

 

I have another example of a friend who is selling a property in bondi for about $2.7mil, he bought it for around $600k and it was the main residence for a while. I forget the figures now, but he was getting a rental yield of about 1.8%, but had to pay a large amount of land tax on this. The rent after costs per year was about a few thousand dollars.

If he sells he may walk away with $2mil in cash. I think he intends to invest the majority of this in some sort of managed fund. If he got a 4% yield on this he would be on about $75k pa more than if he held onto the property.

Sure he could hold on and get some good capital gains long term, but you can't live on capital gains. He wouldn't qualify for finance so couldn't borrow against the property. He probably could do some work to increase the rents, but even if he increased it by say $20k pa this is still not enough to live on.

Perhaps he could sell say half of the property to another family member who could borrow, but I don't think there are any, and probably he wouldn't want to guarantee their loan either. So the only real solution for him is to sell.

 

He could buy say 3-4 IPs elsewhere too, no, with higher yield? I agree if you only have one IP and expensive one for that matter, the yields tend to be quite low, as to compensate for the capital growth down in time....
How about doing analysis assuming 4% growth in stocks say in the next 10 years from that $2million and what % growth of CG for those investments?, as opposed to 1.8% yield and say 8.6% capital growth from that one IP of $2.7million (looked up RP Data for last 10 years on Bondi NSW gave 8.6% CG).
What would his net worth be from both investments, I wander?
Assuming before he retires he pulls out about $1million equity required for living for the next 10 years, to buy time for the next capital growth cycle of 8.6%, so assuming the rent of 1.8% (unsure whether this is gross or net?) and then around $80K would be needed yearly to live on as per similar funds if invested from ASX?
His IP at 8.6% CG would be around $6.16million (of $2.7 million), so even though he took out $1million in extra loan to live off he gained $3.46 million in capital growth in that same time so net $2.46million his wealth grew in addition to his living of equity. Also, no tax would be payable as he just used $80K of his equity each year, as opposed to $80K income he would derive from ASX each year, and I don't know if his stocks or whatever he invested in ASX would produce 8% CG?
I realise this is all hypothetical, but no one has a crystal ball, and since we are using also assumptions for ASX yield and growth so should we with the IP residential investment, yes?
Obviously there are a lot of ifs, if the bank will release such equity, if the growth will be that % in that time, if it will suffice for the life time, if, if, if? Obviously a more risky approach, as not many would be comfortable living off equity, a different approach, BUT.... one worth considering as a possibility?
But if we just compare on assumptions and take yield and % growth, his IP being located in a high growth CG suburb, I think he will be better of keeping the IP, as with IPs it is ALL about CG that makes one wealthy (rather than income?)!
I don't know the timeframe it grew from $600K to $2.7million what % growth that represents, perhaps you could utilise that interest for the calculation?
I personally consider my Coogee NSW IP as my golden goose and certainly don't plan to sell it ever....my yield is around 3.4%, it is a unit though but the unit is the best in the block and its aspect, with a garage and storage and its own laundry, in perfect location just 2 minutes to the beach, and highly renovated so I have a much higher rent than average.
Hence, in addition, could your friend add renovation to the equation to improve the rental yield?

 

But he cannot qualify for finance so there would be no pulling out of equity or borrowing to buy property.

And I should mention that I am not advising him on this at all - just watching it in slow motion.

 

Fair enough then it makes it harder and if no additional sources of income too...?
What about renovations to improve the yield and have you crunched up the numbers, would he be better off?
I know many people don't plan when they retire unless unforseen circumstances, one lady said she may draw down on her house that reverse mortgage proposal, yet her house was paid off, and when she was still working just before retirement she could have drawn out a lot of equity?
Sometimes that's what happens when we fail to plan....?
Perhaps I am more fortunate enough having more one or two cycles still, a much larger and diversified portfolio with very low LVR hence being self employed having alternative passive incomes hence I plan to live of passive income rather than equity? All I am saying is I have many more choices.....or at least I see it as if I have?
Just heard today how 30% of Aussies in Super are in under performing funds, robbing them of many lost $ so it is sad and unfortunate that a forced saving environment where currently 9.5% of Super is robbing wealth of our people....people need to take more control of their finances and earlier in time!

 

I don't think a renovation would improve the yield that much - unless a major reno which he couldn't really fund I imagine.

No I haven't crunched the numbers and am not going to as not my client or decision. This guy is too young for a reverse mortgage too.

I think he is probably making the right decision in selling as it can immediately improve his life and make a huge boost to his income and the income and capital could last for the rest of his life.

 

I have another client considering to sell a portfolio of properties to invest in shares - after getting financial advice.

The client will be going from about $1,000 per year in positive income to about $60k pa and keeping 2 properties as well. This is after CGT is paid.

Anyone else cashed out of property and invested in shares?

 

I’ve sold a few and been investing in index funds in a family trust and smsf.

Probably should have kept the ip I sold early last year. Will be keeping the rest and continue buying index funds.

As lending is getting more difficult to obtain it’s wise to consider very carefully before selling as buying back in again is becoming challenging.

The trick is to look at the overall, long term picture as MWI does and see how you can have your cake and eat it too!

An observation from the pandemic, dividends can be cut severely. Having a mix of assets, property, cash and shares/index funds and emergency funds is probably the way to go!

 

Never cashed out as in all out, cashed out some gains, mainly for balance and capital concentration risk and to access equity when lending rules tightened about 2015. Kept loans and took out cash. The sold property would now be yielding 11% net on sale price and had 200% CG. But the shares have done better. I did mention some of them on I think a 2017 thread countering dividend investing as Fargo Some of the stocks XRO, ALU, APX, WTC , PME, ALL, ALC, 7+ bagged. Also bought TCH which became APT fpr the equivelant of $1.80, now worth $126 which should be tax free money when they list as Square on the ASX. In March 2020 I said I was going all in maxed out loans on shares, bought at prices that are giving 8% dividend helped extract more equity from property to buy more shares. You dont have to sell property to buy shares. I sell shares to buy property and secure my capital it is the safety net, and the property helps do it in a tax efficient way. Just looked saw SQ is up $62 as you get 1 SQ share for 3 APT, ny $1.80 APT share 11 bagged in the last hour. the APT price is irrelevant now, as it doesnt change how many SQ shares you get.

 

Hey @Terry_w , any of his portfolio on the Sunshine Coast? Having a hell of a time trying to buy something there while locked down in Sydney

 

No, all the properties are NSW or VIC - where the large capital gains have occurred.

 

I am also thinking of the same. Especially to create a passive income and retire elsewhere overseas safe. But not sure whether it is the right time to buy ETF/Index fund & didnt find a good financial advisor.

 

This is definitely something I’m torn especially with a good property. Every year also the cgt continues to grow due to depreciation deductions ie using these refunds to essentially draw slowly the a realised portion until have to add back in sale of property.

I think what should also be considered is time horizon ie at what point is best to do so will depend on estimated gains on sale and also remaining runway to compound reinvested fully franked dividends.

My thinking is that while it’s available to use, sim to continue to compound by reinvesting to more high paying div shares. I think keeping property is an okay plan assuming we will be in low interest environment forever but with what we’ve seen recently selling out to swap with high div shares is attractive.

Also re capital gains, my plan to offset would be to offset by super contributions essentially paying the tax to ourselves! and continue to use those tax savings into more divi shares.

 

Sometimes wearing a bit of CGT can result in higher cashflow allowing faster retirement

 

Agreed.

 

This post was written in Sept 2016. It is now almost 7 years later

VAS was $67.22 then and 91.29 xx now = 26% gain or 3.876% annual average growth

WBC was $28.70 then and is 22.25 = 29% loss

 

And how much is his property now (was it 600K then 2.7mil previously), and if he did keep it or sold it to buy either WBC or VAS?

 

I have a property that is very close figures to your original post. I can build two more properties on it to get a better yield. After re-reading this I think it’s time to do some new calculations on building on it.

 

It was a made up example so it could be more or less depending on what the property was and the timing.

 

Depending on ownership structure and the taxable gain, don't forget CGT could be largely 15% or less next year. from 1 July