Why we would move out of IPs and into another type of investment...

There have been numerous comments about the fact some of us on PC are discussing moving out of property and into other investments and some people are suggesting this is because we don't believe in property any more.

We are considering this and it has nothing at all to do with our belief in property as an investment vehicle. Property (and our hard work and living frugally at times) got us to where we are, and we were very "slow and steady" investors.

We are heading towards *cough* 60 and have a development to work though. We are in no hurry because life is to be enjoyed, and while we potter along slowly, working out what the heck we are doing, hopefully Brisbane house prices will be rising. It also means when we get to actually build our townhouses, the build cost will be higher, but that is ok.

I've chosen one house to use as an example of why we are thinking of doing our build and then maybe selling a house or two and putting funds into maybe shares(?).

Primarily it comes down to yield and how it has been badly affected over the years by land tax.

Also because I cannot help but wonder what sort of return we could get elsewhere with no maintenance, upkeep or tenants. These things are not a bother to us now, but as we get older, I can see that we might start to wish we had less things to manage, and also look for a higher income stream.

Just as an exercise I will take one of our houses. It cost us $156k about 18 years ago. We have spent about $40k on it (roof, kitchen, deck). We also have to paint it every ten years or so (timber) to keep it looking its best. Its value now is hard to pin down because it is a development block but the killer for us is that the land tax threshold seems to be stagnant and the land value just on this block alone is now nearly $750k.

If this house wasn't part of a bigger plan, we would very likely sell it for maybe $800k (just a guess). It is hard to pinpoint value because it is a size that can be developed.

The rents here are flat, and we are getting $580 per week. I've not raised the rent for a few years because the tenants are fantastic, and they have allowed us to have designers, engineers, surveyors etc enter and do their thing as part of the DA process. A few years ago when we first started down this path, that was market rent, but rents now are flat, and I believe if they left, we would struggle to get that right now.

We won't be selling this block "as is" but if we weren't going to develop it, we would seriously look at selling it and putting $800k into shares or some type of investment.

We'd have to earn 3.75% to match our gross rent, and that is before we lose a big chunk to land tax, let alone rates, insurance, utilities, maintenance.

Land tax wasn't a problem until more recent years, and in my opinion, this is a big driver for people to look past property. It certainly is the "biggie" for us.

When we bought this house, I don't even think we'd heard of land tax.

I understand (could be wrong?) that if we sold the house and opened a SMSF with the $800k - held in blue chip shares, or across some safe spread of shares - we could earn considerably more and would pay no tax on the income after we turn 60. Is that right?

 

Agree Xenia. But we are not interested in starting a business. Or buying a business or buying a job.

Hubby retired aged 50 and is very happy being retired.

We are happy to do our development and that will keep us interested.

 

Just remember that if you buy shares, you *are* buying into a business (it is part ownership).

So buying shares *IS* buying a business. If you aren't getting someone else to pick and choose your shares for you (eg a managed fund or LIC) I strongly recommend you understand the business you are putting your money into.

The Y-man

 

I take your point, but we won't be "buying a business". I understand we are buying "into" a business, and we could just as easily pick a bad share as a good one. Therein lies my dilemma. The only time we ever bought shares directly we lost the lot. Luckily that was when the most we could scrape together was $1k and we lost it all. It was a big blow at the time. Laughable now.

But my point in reply to Xenia's post was that we aren't looking to go to work in a business or buy a business. Hubby is very happily retired and once we start our DA process we will be kept busy with that process.

But with no income other than rent coming in, we must be very careful with what we do. It means we cannot refinance, must work within the loan framework we currently have and sell something in order to do the build.

If we end up selling a house as part of our moving forward and don't have to put the funds into building, I think we would put those funds into some kind of fund where someone who knows (hopefully) what they are doing is steering the ship.

 

We currently each have a super account. Can we open a completely brand new SMSF holding shares?

 

Thanks for the link. I'm putting the cart before the horse, because until we start on our DA, we won't be selling anything. So we are a fair way off needing to even think about what we do next.

And we have our accountant helping us through the tax implications of different paths we could take (and being very polite when I send him a "what if we do this?" email).

I've always thought I'd love to flip houses, but reality is that we have two houses we have to lift/shift and renovate, so the desire to renovate will be satisfied and I don't need to buy something to renovate. I've got two lined up.

(...not to mention the buy in and sell out costs for a flip scenario pretty much make it something to keep me satisfied more than to provide a huge profit.)

 

Perhaps consider a REIT? It is part ownership of one or more commercial properties (and usually a share in the underlying property management business)

At least the "business" is easier to understand as
1. you are into property already
2. you'll understand the implications of LVR, loan expiries, rental yeilds etc
3. you'll know where the properties are (they are real)
4. you can even go and visit the properties and check them out if you wanted to
5. you'll know the bank valuation of the property and how much over (premuim) you are paying for the units

The Y-man