Thank you for the Growth.........It's Time for Cash Flow!

I cannot imagine I am the only one who is finding the net income return from residential investment property is getting lower and lower. Even though some rents are rising now due to shortages in rental accommodation in various places, the expenses and in particular insurance and land tax far outweigh any escalation in rents. In SEQ, vacancies are very tight and the rent increases I have placed on lease renewals is merely playing catch-up for quite some time in the doldrums. In Sydney the type of stock I have are seeing falling rents at the moment. In Melbourne my holdings are mostly sideways for now. I imagine rents may rise in our biggest two cities once immigration starts to make a comeback.

The growth from residential property has been outstanding over the past 30-40 years. Negative gearing hasn’t really been a big feature over the last 5 years with rates being at historical low levels. The notion of retiring from passive income only from residential rents is becoming a dream. An investor can either eat capital or for the brave they can try living off equity which is getting harder and harder with APRA mandates and bank's appetites for less interest only products. Skinny LVR’s and flying under the bank’s radar would help those seeking to achieve this. Living off Rents was the strategy I had in mind, yet with a not insignificant portfolio and an LVR well under 10%, the holding costs (exclusive of my trivial interest expenses) are relegating this to a bygone era. At least it is for me and my portfolio of older land rich assets.

I always had a strategy to sell off a couple of resi properties to rotate into commercial for higher net income and less aggravation than residential leases. With land tax for some properties now in the range of 25-30 percent of the gross rent, the net return exclusive of any loan is pitiful. I am diversified over three states, with some in my name, some in trusts and a couple in our SMSF, yet still this impost is frustrating and a real financial drag. In Qld as an example my land tax this year will be 2.5X that of last year. Some might be thinking, first world problems here. I am definitely grateful for the portfolio I have amassed however it was not entirely easy and not without sacrifice and risk. I am sure most here didn’t achieve their portfolio holdings without some sacrifice and risk taking.

Thank you for the growth residential property, but it’s now time for income. My wife and I will be offloading around three quarters of our holdings over the next few years, instead of the one or two we had originally planned, and pursue triple net leases from some industrial style assets and the notion of digital rents from fully franked dividends is becoming more and more appealing. As I accumulate birthdays I seek to lessen the aggravation that the residential domain entails. Whilst we hold a decent portfolio of shares and A-REIT’s in one of family trusts and also our SMSF, I need to work on my own mindset to place the not insignificant proceeds of our sell-off into the stock market, whether in LIC’s or index style ETF’s. With liquidity comes the temptation to tinker

I have some work to do to not look at markets and the volatility that presents from time to time. Ignoring it is easier said than done, at least it is for me

How are others finding the rapidly escalating expenses of their residential portfolio irrespective of their interest bill and do you have a plan for rotation into assets that provide greater net cashflow?

For those who have rotated to digital rents/dividends, do you have your entire net worth in the listed markets and how do you deal with volatility and any strategy to ignore the on paper drawdowns?

 

This is an incredibly valuable post @Player - I look forward to the discussion that comes from this thread!

You are further along than me so I don't claim to have any wisdom for you. My comments only having observed quite a few retired land rich clients and they agree there is a point where the pain of land tax eats into the joy of property ownership. Probably a mixed bag of interstate higher cash flow resi, plus commercial, plus shares plus other income products. Not sure there is 1 silver bullet.

One residential solution is to sell some stock to purchase higher yield regional (lower land value plus higher yield) and diversify across the states. Building new stock avoids crappy tenants and achieves maximum depreciation so building a few small to medium townhouse developments in tight rental markets around the country could equal low hassle property income for the next few decades?

Other creative options include cycling some capital into primary production land a gaining the land tax exemption. If you still want the thrill of the hunt you could grab a farm with some future subdivision potential

 

Great post @Player. And welcome to the other side.

Something I want to say first. I have had the privilege of meeting a number of members from this forum over the last 3 months. For a bunch of online strangers I have found them to be some of the friendliest and most genuine people I have met in my time.

A few months ago we one day randomly decided we would make the move up to the sunny Gold Coast. Have not spent any time on the Gold Coast outside of the few touristy holiday visits. I reached out to members on this forum for advice and tips on moving to the GC. A number of members provided me with very helpful information and I am very grateful.

@Player spent countless hours online and on the phone providing me with all the ins and outs of the GC. He then offered to meet me on the GC and be my guide during my visit. I made two trips up and each time he took time out to meet and provide me with his wisdom and local know how. He even drove me around and gave me a run down of the key local areas and spots.

It’s people like @Player who restore one’s faith in humanity at a time in which we are surrounded by so many acts of ugliness from one another.

@Player I hope I am not out of line with my post, but felt like such acts of generosity should be pointed out and I am indebted to you for the kindness you have shown me and my family.

Sorry for hi jacking and back to your post. I think your making the right decision migrating towards a less painful cash flow based portfolio. We already shared our stories when we met so I won’t repeat it here. I will be your neighbour in exactly 9 weeks and will spend as much time as I have to working on getting you over the mental hurdle of switching from property to equities and equity like assets.

 

Yes, should have done this a few years ago when we were chatting about it on here

 

We are in a similar situation - planning retirement and working out the cash flow.

All our property investments are now multi occupancy which helps a bit - so some granny flats might be worth considering.

Our LVR would be around 15% including PPOR and amounts in offset but the P&I payments lessen the cash flow. We made a couple of large sales to build the cash buffers and have access to super - but would prefer to not eat the capital as you mention.

So looking at the same issues as you - so will follow this thread with interest and post any progress we make.

 

Great post @Player and def food for thought for the rest of us. Will be very interested to see how your situation evolves blow by blow so pls keep this thread running throughout your journey. I'm in a similar-ish position to you but current LVR is circa 40% . It's quite sobering that at 10%, you still don't have much leftover after deducting expenses. We have been forewarned so thank you.

And lol I swear when I saw the title of this thread, I thought you were referring to creaming it via rents after the growth spurt we just had.

I decided a few years back that LOE wouldn't work - APRA sealed its fate. LOR was never a goal of mine because in reality, one has to wait till the loans are fully extinguished (en masse). For me, that's 20-25 years away. Too long for us.

Also, as you're witnessing now, your cashflow gets decimated by growing expenses out of your control and land tax, then on what's left over, income tax. LOR is an inefficient vehicle for cashflow.

So I am priming things in anticipation of semi-early retirement by:

• maxing out on Super
• selling resi portfolio down and dumping proceeds into ETFs, LICs and direct shares - that is what we'll live off essentially. Given the good growth we've seen (and some which we'll probably be giving back), I'd say we need to sell down about 1/3rd or so. I'm comfortable with shares and their fluctuating price doesn't really get to me very much. One just needs to hold their nerve if they picked their stocks carefully.
• resi IP keepers are to be cash neutral at worst. I think having manageable debt is optimal rather than no debt, plus offsets are a great place to park cash.
• in my case, inheritances may also come into play, although we can retire on our own steam (by selling more)

 

Not yet, ride another wave with Perth then call it time

 

Great thread, we are probably at the same stage and looking nervously at the capital gains tax.

 

Have you considered residential lessors interest ?
https://www.domain.com.au/news/live-for-the-moment-20110408-1d6j2/

 

@Player to your last question, putting aside the family home we have no direct real estate. Approx 75% of assets are listed equities and bonds. Remaining c.25% is unlisted businesses and direct venture capital.

I think approaching this from a top down asset allocation perspective will be helpful, rather than bottom up (specific exposures) and work through all the reservations you have about assets that you don’t directly control. I’m still keen to catch up for that coffee at some point, or Zoom and @Big A will be able to help on that front I’m sure.

 

Great post Player. Thank you.

Yes, it's disappointing, isn't it? I was bought up on the mantra that you buy as many properties as you can afford, sacrifice like mad to hold onto them, (I lived in Perth for 10 years and never went to Bali once. As friends did regular long weekend mini breaks there, I spent my weekends renovating, attending seminars, reading weatlh books, working a second job to get financing or to cover the shortfall, practicing delayed gratification like a good wealth student), then they will grow in value and you sell half, pay out the rest and live on the rent for the rest of your life, which is indexed to inflation so it's actual value to you will always be secure.

Then you get there, and you realise that if you sell off half and pay off the other half, that other items are also indexed to inflation that the seminar presenters and authors must have forgotten to mention. Things like insurance, rates, repairs, replacements and management fees also go up. Then there is the land tax that is very hard to calculate with futuristic modelling, "In 2022 I predict my land tax will be 2.5x higher....." Not to mention and left over income then gets taxed.

I see why so many, myself included, drift to the sharemarket and the 'lesson fees' e.g. losses stack up, until you discover the wisdom of Jack Bogle. I love the old school wall street fellows, with their sense of fiduciary responsibility to their clients interest. His discovery was just to minimise managment fees and brokerage and enjoy the 3% yield and 5% growth of the entire stock market via ETF indexing. Enjoy the average. Don't try to beat the average.

Of course in Australia, we have a favourable tax system to recieve this money from the stock market, just like we have a favourable tax system to receive the loses from the real estate market.

Strange.

How to move your money from real estate to the stock market becomes the game then. I am choosing to sell one at a time and move the funds into an offset account. The stock market can and will fall heavily at times, so there is a risk if you put 100% of your funds in today, it could drop 30% tomorrow. My strategy is to do another old school tactic of dollar cost averaging, buying the same amount of the ETF each month. If prices are high I buy less units, if it has a correction, I buy more, lowering my average buy price.

I deal with the volatility and on paper drawdowns by believing in the market long term. I also have this money available in case of a big 1987 style crash, where I can increase the amount I put in each month during this period if I choose to. This way I am not waiting for a correction (a fools errand), but I always have cash available as I steadily deploy my funds into the market.

Once my funds are fully investement in the stock market, I look to sell my next highest growth/lowest yield property, pay my taxes and repeat the process.

I will keep a couple of properties, but only ones that have multiple income streams and are fairly new. I have also discovered that a single income older property doesn't bring in the income.

Good luck to you, it is a hard earned position and natural to be concerned about losing it. The ultimate end result though, is not to worry about losing it, but enjoy what you have created!

 

That’s a solid strategy.

Look at it this way. If you sold down property and put all available capital into equities today, would the dividends from the equities be a sufficient income stream for your lifestyle? If the answer is yes and ideally with leeway to allow for some reduction in dividends during say a ugly market event, then what price the market allocates to equities after you have bought in doesn’t matter. Sure it’s always nice to buy at a discount, delivering you more dividends for your dollars, but it’s anyones guess when and how much of a discount the market is willing to offer at any particular time. Todays high prices will be tomorrows discounted prices.

Buy in, forget about the daily price and enjoy the hassle free income.

 

I sold my industrial units 5 years ago and invested directly into shares keeping aside enough cash to see me through several years if the market crashed. I have only just got my portfolio working the way I want, dividends every 3 months and the right mix of companies It was a learning experience and I made some mistakes in the early days. I feel a little more confident now so may invest further in the share market.
I had made up my mind I would only trust myself to manage my affairs so dont use an advisor ...
A life without tenants is a good life ...

 

Great post Player.
Because I started at 50 my strategy was always to buy as many properties as I could, wait for the boom, sell half and retire. Did that! I thought I'd hold the remaining but now I'm over it. I'm selling one now which will top up the offsets. But what to do with the money if I sell more?

Would be great to have a GC meetup when you arrive. I've missed the last couple. We moved here in 2020. Love the lifestyle here. We looked at the Sunshine Coast also. So much more here. I'd be interested in hearing your thoughts on equities as I know nothing about that.

 

Sounds great mate. Would love to catch up when we get up there. It’s been an absolute whirlwind. Only a few months ago this was not even on the cards. Within the last 2 months we have purchased a place, engaged an architect and builder and looking for a rental to go into in 9 weeks time while we build. Kids already enrolled to start school up there in term 3.

Will go into further details and share experiences when we catch up face to face, but I was also a hard core resi property person until about 6 years ago when I switched over to equities and unlisted property. Then shortly after added in some mortgage syndicates.
A bad experience with a tenant was the trigger for us to get out of resi and after 6 years I’m glad we did. Our current PPOR will become an investment when we move up in 9 weeks and that’s the only resi investment I will hold.

I think resi is great if your not looking for the cash flow and happy to wait for the rewards of long term growth. This works when your younger and plugging away at work plowing money into resi. When your getting older or looking at moving away from earning a working income then I’m not sure resi works as well.

It’s hard to generalize because everyone is in a different place with different levels of capital and size of portfolios. The more capital you have the easier it is and the more options you will have. If you have plenty and went with a simple VAS / VGS you could just live of the dividend. How much is plenty? I like to use simple and rounded numbers. And I always round to the conservative side to allow extra error room. But let’s say you work of a 3% gross income from a vas/vgs split portfolio. You throw in $2m. Is $60k gross sufficient for you? $2m is a lot of money. While $60k annual income is not terrible it’s certainly not a lot. Now if you have many more millions and can do the same and pull out a $200-$300k gross income, then its an easy option.

So let’s say your capital is on the lower end and the 3% gross income will not suffice, then you look at higher yield options such as reits, listed or unlisted. Mortgage syndicates are also a high yielding option. Though approach those with caution. Plenty of cowboy operators in that field. Adding in some higher yielding options will then push up your income.

it all comes down to how much capital you have to play with and how much income you need.

I wanted a fairly large income. I have young kids and high household expense. So I went heavy in the high yielding options mentioned above when I started out. Now that I have reached that income goal I have moved to all future allocations going into the VAS/VGS split.

 

Love this! The simplicity is beautiful!!
(did you actually execute this Every month without fail since 2002?..Respect!

Every month , just buy 100 Vas, 100 VGS , 100 STW..Period!

Just 2 question thoughs...i had a look and your
a) Dividends (monthly) is approximately 17K and yet
b) Investment every month is about 26K..

Unless you are having other Passive sources to live on (or are you still employed?)..how do you execute this?

And did you utilisie your Superannuation in this strategy?

Thanks for sharing! Just beautiful..

 

Apologies but i tried to quote Satay's message above but failed miserably..

FYI it is the #12 post above...

 

I have been facing this problem of needing to transition from a strategy of high assets low cash flow to one that is more accommodating for carefree living.

During the transition of the financial strategy, a major problem is the CGT that will be incurred with the sell down of multi year IPs.

My strategy:

1. a mix of IP holding in different structures including trust
2. a loan portfolio with offsets
3. a smsf to contain future concessional contributions and invested predominantly in stable and occasionally in opportunistic ETFs and shares
4. seeking a situation to include newer IP
5. involving the next generation particularly in points 1 and 4 for legacy
6. perhaps to contemplate a PPOR that is low set and have a contingency fallout shelter in zombie and nuclear situations

During the sell down, points 1 and 3 will help in keeping the CGT to a more comfortable level.

 

Personally I’d consider a total return focus rather than primarily income focused. Capital is taxed at 50% of the rate that income is, and you will have reset your cost base on the exit of residential properly. Granted it is not as intuitive as “living off income”, but worth looking at if you have the inclination.