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.