IP Admin & Mgmt in our twilight years

G'day Macca,

Just missed your post, sorry. I reckon you've hit the nail on the head in terms of peace of mind.

I most definitely wish to get to a point where I can be totally hands off if possible (this would be the ultimate end goal for me).

There is no way I can see myself still administering properties in years to come. In fact even now it is becoming an unpleasant grind and I often find myself having 'dark thoughts' of ridding myself of the real & perceived imposts.

Then reality kicks in and I say to myself that I"ve only got another 8 yrs of constant admin before I start trading these assets for other less onerous vehicles. Unless in consultation with accountant & FP we determine that I should bail out of my PAYG job early and progressively sell out of real estate holdings???

"Peace of mind"...I'm so looking forward to that after having had a few rough years of late.

Cheers!

Ian.
 
A few things that I've done (not saying you should do the same!):

- pace out the selling over several years

- manufacture several years of lower income at the end of your career as you transition into retirement, and time your selling then

- maximise the ability to distribute profits to your sons via your HDT.

Don't do it alone, get advice from your FP.

hi troung

would you be able to share a few things with us. i'm much younger but realise that it will be a good thing now to plan ahead for when i finally pull the pin in earning an income by working for someone.

i'd like to know if your strategy post retirement is to still hold RIPs that have loans outstanding be it small or medium e.g. LVR on these RIPs are below 50% to continue to attract capital growth.
 
Hi Ian,


Congratulations on getting to the point that you are at. You are in a position where you have nice decisions to make. In the grand scheme of things, whilst paying CGT to alter strategies may be economically painful, it's far more palatable than other decisions people your age and older are forced to make due to their lack of planning.


Pat yourself on the back for even recognising this as an issue. It will become relevant. You are correct that most people at the start concentrate on the acquisition side of things....understandable really, none of these other issues come up if you don't acquire them.


We are quite a bit younger than yourself, but seem to be at about the same stage with respect to kids. Your point about getting your children up to speed and being responsible with finances is extremely valid. No need to go into what happens if you donate your life's work to children who are clueless about investments. We have been addressing that very subject for the last 5 years or so.....it's challenging to say the least with everything else bombarding the kid's attention every few seconds.


Trying to cut through to them about learning to efficiently inherit and effectively manage a multi-million dollar asset that throws off bucketloads of cash vs "Justin Beiber looks hot" is frustrating for both them and us !!


We recognised the very issue you have raised about 10 years ago. It was a secondary issue (but still important) behind the primary issue of houses being pathetic when it comes to income generating assets.


The three drivers that pushed us into the commercial corner we now happily reside in were ;

  • Land Tax was killing us
  • Rental income was too low
  • Maintenance costs and admin time were too high


We made a conscience decision not to buy assets that added to those burdens. Houses / flats / apartments / townhouses and units all just added to the pile with those 3 things, so they were immediately off the buying list.


By switching to commercial property, we got to palm the Land Tax off to the Tenants, rental income went through the roof, our maintenance costs and time disappeared and the admin reduced per property (for example paying 1 council rates bill on a $ 10 million property is less onerous, especially when the Tenant pays it for you.....than having to pay 20 council rates bills on 20 x 500K houses that you have to pay for yourself).


Anyway....changing strategy now may be too late for you, but certainly not your children. The CGT roadblock is a very real one, and one that we have also grappled with. I've put it on the backburner for now, and just deal with the low rent and high maintenance costs and time as part of my workload.


Perhaps in the future, when the house rental income becomes irrelevantly small, i.e. less than some arbitrary figure of say 2% of income (nearly there !!) one way we can avoid the maintenance and admin of dealing with residential Tenant problems is to simply knock all of the old houses over and keep the vacant blocks (thereby avoiding CGT), take out a 75% or 80% line of credit against their value and invest the funds into blue chip shares paying fully franked dividends.


This solution will provide for ;

  • a marked drop in admin time and costs
  • not cost much in income reduction
  • extracting the vast bulk of the equity from the residential portfolio without triggering a CGT event
  • still enjoy any potential capital gains from the residential land appreciating
  • allow you to invest most of your capital in shares or other income generating assets with much lower effort required from you
  • efficiently re-gear your portfolio with the interest from the LOCs being more than paid for by the dividends


We have time on our side to see which way the wind blows, as do you.....who knows, one of your sons may step up the plate and show some interest.


I've taken the approach this stuff is waaaay too important to leave to the teachers and education system.....plus they have absolutely no clue about it anyway. I've found though, the kids need to see with their own eyes and touch stuff with their own hands.....tangible stuff that they can walk through. Numbers on a spreadsheet puts them to sleep.


I took our eldest daughter out to one of our industrial sites the other day for the first time and she saw dead car bodies being crushed into a metal bailer, then the resultant metal lump being loaded into 20' containers for recycling. The size and scale of the operation was overwhelming for her, with men working flat out. She was very impressed and mesmerised by the whole co-ordinated show.


Directly afterwards, sitting in the car whilst continuing to watch the operation and discuss the real estate nuts and bolts behind the acquisition of the land and what it took to get the property up and running to attract a Tenant who was prepared to invest $ 100's of thousands of dollars in our property for the next 15 years made an impact.


Exposing your kids to the real education of what serious property investing involves is very worthwhile when they have multiple "light bulb" moments.....but it does require a decent level of trust and responsibility....they need to be ready to accept the lessons. You are probably best placed to decide when that is, but exposing them to the real life stuff out there we've found a better way to go rather than just numbers on paper. All they'll see is a yellow Lamborghini.
 
Good question. Our firm has aged care services as a part of its client services and these issues arent isolated. Unfortunately as we live longer (not unforunate as such) the issues of estate management become a real worry for some.

Not all older retirees have family and not all can trst them either. Estate planning startegies and control issues need to be considered well in advice or you may find once you are in a hospital its too hard to implement.
- Power of attorney
-Guaradian ship
- Supervision of the above
-
This probem is now made worse by some who thought SMSFs were a great idea in their 60s. Now in 70s they see a burden. Strategies exists for these and might include using a SAF (small APRA fund). Not as high cost as many think.

My suggestion is to get your fianancial planner and lawyer together and all 3/4 of you discuss your strategies. Then when its implemented a family debrief so they know your thought and wishes. Simple things like your binding death noms for super need review as well as wills, review assets and tax planning for their best strategy, power attorneys etc...All this should also be considering structuring so pension benefits and aged care issues arent blocked. At this time I would be reviewing your IPs...Are they owned correctly and what is the strategy ?? How can super minimise taxes ? What do YOU want to do for next X years. .....
 
hi troung

would you be able to share a few things with us. i'm much younger but realise that it will be a good thing now to plan ahead for when i finally pull the pin in earning an income by working for someone.

i'd like to know if your strategy post retirement is to still hold RIPs that have loans outstanding be it small or medium e.g. LVR on these RIPs are below 50% to continue to attract capital growth.

This is a complicated matter with many variations depending on personal circumstances. Generally your aim in retirement is to maximise income (net rent and dividend) without touching your asset base. If you can achieve that then in theory your assets will last forever and be passed intact to your family.

If you have a RIP at say 80% LVR, you're likely to be negative geared. Your 20% capital is producing nothing and costing you money. If you need income badly then you'd better sell the property, take your cash out and get a better return elsewhere.

However you may be in a position where income isn't a problem (because you have other assets producing enough for you to live on). Then the question becomes whether you value the potential CG with its related leverage more than the potential income. Or you may reduce LVR to say 50% and be neutral, in which case you're trading part of your leverage for no holding cost.

It's a matter of personal choice at the end of the day but the key question remains whether you'll have enough income or not. So your first aim should be to build up enough assets, only then will you have the luxury of choosing your LVR.

In our case we intend to leave the family trusts (where most our IPs are) as going concerns to our kids. I understand trusts will not be part of our estate, therefore we don't want to leave any outstanding loans that would result in the trusts having to sell assets to repay these loans, so our LVR there is nil. And yes, your asset structure will have a major impact on your LVR.

Another thing we're doing is to keep out of the trusts a number of IPs earmarked for charity. These have 80% LVR but don't cost us anything to hold (NRAS). We're waiting for some good CG before we give them away. So in this instance the choice of LVR is a consequence of the final use intended for the assets.

As you can see there are myriads of things to consider that would lead to different conclusions. The only common theme is the need for planning.
 
...one way we can avoid the maintenance and admin of dealing with residential Tenant problems is to simply knock all of the old houses over and keep the vacant blocks (thereby avoiding CGT), take out a 75% or 80% line of credit against their value and invest the funds into blue chip shares paying fully franked dividends.

This solution will provide for ;

  • a marked drop in admin time and costs
  • not cost much in income reduction
  • extracting the vast bulk of the equity from the residential portfolio without triggering a CGT event
  • still enjoy any potential capital gains from the residential land appreciating
  • allow you to invest most of your capital in shares or other income generating assets with much lower effort required from you
  • efficiently re-gear your portfolio with the interest from the LOCs being more than paid for by the dividends

This bit I don't understand. If your IP is valued at $1M and it has always been an IP, and you've never lived in it (ie. you will pay capital gains tax on whatever gain you make on its sale), and you remove or demolish the house, the block of land is likely to be valued at $800K or more. Why does this negate the payment of capital gains tax? Assuming you paid $200K for it, and with the house now gone, wouldn't you be paying capital gains tax on the difference between purchase price and sale price whether or not there is now a house on it? I'm curious now.

Another thing we're doing is to keep out of the trusts a number of IPs earmarked for charity. These have 80% LVR but don't cost us anything to hold (NRAS). We're waiting for some good CG before we give them away. So in this instance the choice of LVR is a consequence of the final use intended for the assets.

If you will be giving away a number of IPs to charity, why do you want to wait for some good capital gain before doing so? I'm amazed at your generosity, but curious to know what impact waiting for more gain will have for you?


Finally, our kids have grown up thinking it is "normal" to paint houses, rip out kitchens and bathrooms etc. They happily helped out until they hit the mid teens, when all interest ceased, even with the offer of payment for their work.

Now with the oldest at 25 preparing his second PPOR for sale too buy his third PPOR (kept the first PPOR as an IP), he is working very hard (with our help) to get it ready. He has matured. If he and his partner could hold this house as a second IP, they would do so, but it is a stretch too far.

Second son at 22 is itching to buy his first house, live in it with his mates to offset some expenses and youngest at 18 couldn't give a toss about houses, but I do believe that the way they were raised is ingrained in them.

Ian, at 15 and 17 your boys are at the age where ours lost interesting in anything to do with painting, plumbing, landscaping etc, but if your boys have grown up with some understanding of what you do, how it has made your life easier and set you up for a good retirement, I believe it will come back to them once they get over the teenage years.
 
I'm another reading this thread with interest. I'm also 52, although Hubby is a tad younger.

We've also got a few IP's, and the amount of paperwork is something that I totally hate. Hubby is planning on retiring next financial year, and I'm reflecting on our portfolio.

My thinking at the moment is to sell off a few, and we've earmarked the ones to go. These are older places, so trying to offload some that will require more maintenance, and replace with newer properties.

It would be lovely to have something set & forget, that just throws off income, but that is never going to happen with resi property, but I'm scared of going to the dark side & putting it all on shares. Part of me feels that this is like rolling up to the casino & putting it all on red.
 
This bit I don't understand. If your IP is valued at $1M and it has always been an IP, and you've never lived in it (ie. you will pay capital gains tax on whatever gain you make on its sale), and you remove or demolish the house, the block of land is likely to be valued at $800K or more. Why does this negate the payment of capital gains tax?

Obviously seek accounting advice from your own accountant, rather than believe some dodgy anonymous nobody on the web.....but my understanding is that a liability to pay capital gain tax is only triggered when an asset is sold.

The arrangements as described, nothing happened to the title deed. There was no sale, hence CGT is not triggered.

Could be wrong. Have been before. Will likely to be in the future....
 
It would be lovely to have something set & forget, that just throws off income, but that is never going to happen with resi property, but I'm scared of going to the dark side & putting it all on shares. Part of me feels that this is like rolling up to the casino & putting it all on red.

This was something we knew we needed to avoid, and so in our 20's, we invested in the stockmarket, buying and selling shares like BHP, CBA, Amcor, Westpac and PBL.....in an attempt to educate ourselves and get to learn the lingo.

Nothing big $ wise, just a few grand here and there to see how it all worked. We stayed clear of the tiny little penny dreadful mining and oil and gas stock.

Learnt to absorb the annual reports, what imputation credits were, how to read a balance sheet and P&L statement, see how the earnings and payout ratios varied and enjoyed the stability of increased earnings, and hence growth in capital value and dividends, all with the dividend reinvestment plans for those companies that had them.

Based on that 5 or 6 year trial run, we would be happy and comfortable to jump back in and invest more substantial amounts for income generation, knowing the likes of NAB, CBA, ANZ and WBC aren't exactly going to fall down any time soon.

Getting comfortable was the key outcome.

A good share should feel to you like owning a bog standard boring house. Stable capital, steady income stream.....the big difference is the roof won't leak and all of the paperwork and costs are taken out....you just stand there at the end of the line and collect the prize.
 
If you will be giving away a number of IPs to charity, why do you want to wait for some good capital gain before doing so? I'm amazed at your generosity, but curious to know what impact waiting for more gain will have for you?

Sorry, no wonder you didn't understand the way I put it :eek:. I'll rephrase: When the properties achieve the level of equity that I have in mind, I'll sell them and donate the cash. 20% growth would double my money.
 
Another thing we're doing is to keep out of the trusts a number of IPs earmarked for charity. These have 80% LVR but don't cost us anything to hold (NRAS). We're waiting for some good CG before we give them away. So in this instance the choice of LVR is a consequence of the final use intended for the assets.
QUOTE]

Your kids could put you into a home :)
Check that the donation will be deductible first. There have been well publicised instances of trusts that make gifts only to have ATO or Courts deem the trustee didnt make it correctly. So the assets go to charity but the trustee gets smacked with a tax bill or a liability to pay to beneficiaries. The infamous Bamford case involved just such a situation - Church got the $$, Bamford got the tax bill. Tax agents and lawyers got the headache.
1. Does it comply as a donation ?
2. ABN compliant ? Have seen many instances of a donation to an entity that isnt the gift deductible entity. So no deduction. I assume you want to wash any cap gain with a donation ?
3. Does the trust deed permit it ? Income of the trust estate that doesnt go to a beneficiary (according to deed !!) is assessed at top marginal rate to the trustee.
4. Has a valid distribution to a charity beneficiary occurred ? Legal compliance is a must.

Its not the trustee that determines where it goes really. The terms of the trust guides the trustee who must follow the terms of the trust. If deed says MUST go to a beneficiary and a charity isnt a beneficiary then seek advice from a LAWYER. This isnt a area for accountants and tax agents to advise.:(
 
I'm finding myself surprisingly open to moving out of bricks & mortar (never thought I would ever say that) and into investments I can't physically touch.

Although, I am a lot younger to you, but I thought I would share my investing experiences outside bricks and mortar in particular sharemarket.

If you do consider investing in the sharemarket, you need to be aware it is a totally different beast from your Resi property. I would strongly recommend you invest small sums of money for atleast 3-4 years before you commit large sums into it.

The reason is you need to develop the temperament required to successfully invest in the stock market. Be mentally prepared to see your portfolio being volatile. It it something that you need to get used to seeing how much your assets are worth every single day (ofcourse, you could choose to ignore and not brother checking your brokerage account everyday, but it will get some time getting used to filter and ignore all the noise from the stockmarket).

Don't get too caught up in what you see on news channels about why the stock market went up and why it went down today. The people telling you reason themselves don't have much of a clue. I have heard news where one day stock market goes down on rumours that US will invade Iraq and then go up the very next day and the reason given? Because now it is confirmed US will invade Iraq so there is no longer the uncertainty. Go figure..

Nowadays, I solely invest into stockmarket buying low cost index ETF's through discretionary family trust. I do use leverage but the LVR is much lower than Resi. property.

I believe the above structure and investments would be as passive as it can get with satisfactory returns. Knowing you a own piece of the top 300 Australian companies is very pleasing. Those top 300 companies can change over time as new more competitive companies make their way while some old companies fail. But you will always own the top 300!

Cheers,
Oracle.
 
Same issues can also apply to personal donations.

Before you gift, check with the charity who should guide you. They want to use the relevant stamp duty concessions too. (Your transfer to them should be exempt if all rules are followed). You will need valuations - They should assist.
Hang on you said cash...No issue. I will keep the comment for others though...

There is a little known about special process where you can elect to defer personal donations too....Normally donations dont cause a tax loss and can be "lost" (no c/fwd losses) . BUT you can spread it over five years. The way it works is a bit absurd and the correct way is to defer it 5 years. Then you elect to amend each other year and bring it forward to the extent of income. the Govt bought this in a few years back to encourage philanthropy and thought it easy to do this than change lots of tax law.

Also watch that if its hubby and wife that you both get deductions rather than just one...Maybe even adult kids ?? They may appreciate the tax benefits if you dont.

For anyone thinking a property gift you should also realise many charities dont want your property gift and will sell it for the cash. Dont be afraid to ask their intention. I was involved with a major charity's board and many people left their estate and family used to get upset that they would sell it asap
 
...one way we can avoid the maintenance and admin of dealing with residential Tenant problems is to simply knock all of the old houses over and keep the vacant blocks (thereby avoiding CGT), take out a 75% or 80% line of credit against their value and invest the funds into blue chip shares paying fully franked dividends.


This solution will provide for ;

  • a marked drop in admin time and costs
  • not cost much in income reduction
  • extracting the vast bulk of the equity from the residential portfolio without triggering a CGT event
  • still enjoy any potential capital gains from the residential land appreciating
  • allow you to invest most of your capital in shares or other income generating assets with much lower effort required from you
  • efficiently re-gear your portfolio with the interest from the LOCs being more than paid for by the dividends


We have time on our side to see which way the wind blows, as do you.....who knows, one of your sons may step up the plate and show some interest.

Obviously seek accounting advice from your own accountant, rather than believe some dodgy anonymous nobody on the web.....but my understanding is that a liability to pay capital gain tax is only triggered when an asset is sold.

The arrangements as described, nothing happened to the title deed. There was no sale, hence CGT is not triggered.

Could be wrong. Have been before. Will likely to be in the future....

Gotcha. I read it wrongly, thinking you meant that by bulldozing the actual house, and then selling the block, that you would avoid paying capital gains tax on the profit when you finally sell it. Now I read it again, I see you are not selling, thereby not triggering a CG event.

However, wouldn't it be better still to keep the house, keep the rent and still draw down on the value to buy shares? Sure, you keep the tenants and the problems, but palm it all off to the property manager and at worst, if the tenants absolutely trash the place you bulldoze then?

Why not have the best of both?
 
Nowadays, I solely invest into stockmarket buying low cost index ETF's through discretionary family trust. I do use leverage but the LVR is much lower than Resi. property.

I also invest solely in the stockmarket now and with conservative gearing in my family trust, but only invest in individual stocks and avoid ETFs, LICs or index funds.

My SMSF is also solely in the stockmarket, but without gearing.

Have been doing this since I was 33 y/o.

Better to get used to it now than when you're 60+ y/o and may find it harder to stomach.

Still have a few RIPs after buying a handful over a few years and selling a couple recently, and a PPOR.

It's very hard to beat dividend-paying shares for a growing passive income stream.

Directly investing in commercial property is also good with greater control and value-add potential, if you have the financial capacity to invest here.
 
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I see many older clients with portfolio's or either property or shares or even both. They arent interested in selling. It triggers CGT. And if they had to reinvest their yield would become appalling after losing a heap in tax.

Their shares pay a yield of 100% or more. CBA shares that cost almost nothing. ($5.40 original float) Now worth $80. They now pay around their original float price in annual tax paid dividends. Market could drop 30% - Who cares they say ? They dont want to invest in 3.5% deposits. No CGT since they arent selling.
Their property pays a yield of 100% or more. Ditto like shares property cost a small price back in mid 90's and has no debt. Rents pay good income. Why sell.

This concept of looking at what shares and property are "worth" isnt same in retirement when you seek an income stream. A retiree with $100K invested in shares in 1995 and $100K invested in property is now probably worth $800K earning $75K pa. And no thoughts of CGT.
 
It's very hard to beat dividend-paying shares for a growing passive income stream.

TPI, for those considering transitioning to shares to LOD (live off dividends) would you share your experiences with how you've managed the less regular receipt of dividends vs getting rent monthly. for example; dividends you may receive twice a year as oppose to getting rent each month
 
TPI, for those considering transitioning to shares to LOD (live off dividends) would you share your experiences with how you've managed the less regular receipt of dividends vs getting rent monthly. for example; dividends you may receive twice a year as oppose to getting rent each month

Hi stumpie,

That's a good question, I think it depends on your situation.

If you still have some active income (eg. part-time work) or have a very large dividend income relative to your living expenses then I don't think this is such an issue.

If you are planning to fully LOD, then having your first 12 months worth of living expenses in cash before you start would be another option - then when dividends start coming through later that year you would just keep that to use for the next year's living expenses.

Having at least 2-3 years worth of basic living expenses on top of this as a cash reserve would seem prudent anyway.

Alternatively, you could have some commercial property in the background giving you some monthly income to help you manage your cash flow a bit better.

If have the financial capacity to own these directly with sufficient diversity then that would be ideal, if not you could look at indirect options such as unlisted commercial property trusts, private commercial property syndicates or listed commercial property trusts to try and achieve a similar thing.

Rents from residential property are another option for monthly income, though has the drawbacks already mentioned in previous posts so I'm not a great fan of this.

If you are less inclined to do this with such growth assets (ie. shares and property) then you would need to use some combination of cash/term deposits/bonds/hybrids to give you a regular monthly income with lower risk, but if the yields on these are all a bit lower you would need a lot more capital to provide you with the necessary income to do this.

The less capital you have, the more weighted/tilted I think you need to be towards growth assets to provide you with enough income to meet your living expenses.

As Dazz mentioned before, you really need to get comfortable with shares, even if you are at present only comfortable with residential property, as in the long run it is one of only a handful of really good investment options for passive income.
 
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