Sell or keep when you retire?

[House_Keeper]

Like many investors in this forum, I intend to accumulate wealth through investment properties, with the intention to live from the income from the investment properties at the end.

The question I have is what is the best way to achieve this at the end. Considering that most of my investment properties are likely to be high capital growth & low yield, they may have accumulated significant wealth, yet provide very little income. I have noticed about cash bonds mentioned on this forum, but they seem to have low yields. However, I am wondering about other options providing higher yield. How about switching your portfolio to high yield properties when you are ready to retire, or selling progressively the high capital growth properties & investing in property trusts? I understand the considerations about capital gains tax, which is why I suggest spreading the sale over few years.

Holding on to low yield properties does not seem to be the ideal scenario to me. Has anyone considered the options? I would like to hear your thoughts on this.

Cheers,

 

[duncan_m]

I have noticed about cash bonds mentioned on this forum, but they seem to have low yields.

Hi HK,

The bond itself is reasonaly low yeild yes. But thats not the point. The strategy involves being prepared to live off your Capital Gain.

The Cashbond isn't a necessary part of this, its just a way of getting your equity dribbled back to you in a reliable stream and in a manner that the banks will recognise as "Income" so that you're not forced into Low-Doc style products (and rates).

Provided you're drawing down on your equity at a much slower rate than the properties are appreciating in value then you could indefinitely live of it (barring any Great Depressions!)

My plan is to be able to live of HALF of just an inflationary rate of growth in my portfolio.

 

[Aceyducey]

House Keeper,

Cashbonds are not about high yield, they are conversion of equity into income. Either for securitisation or lifestyle purposes.

Thus with a portfolio of high CG properties (whether low yield or not) the cashbond approach is merely turning a sustainable proportion of the equity you are build up into an income to fund your lifestyle (of course there is also a debt being built up).

I can recommend Steve Navra's seminar for you - that will give you an idea of a few different tools for doing what you want to do.

Moving onto other solutions, it does depend on the level of equity you have and the level of income you desire. If you are more conservative in your income requirements or have a very large portfolio, selling a few properties to pay off the rest and then living off rental income is a possibility.

Alternatively, selling all your property & putting it into shares/listed trusts with a divident stream is a possibility.....with a $5M equity portfolio, the 5% or so divident you'll receive is $250K per year - potentially fully franked.

Other approaches include funding new technologies where you get a proportion of patent royalties, being a silent (financial) partner in a cash cow business, placing funds into high yield bank accounts & having rolling terms, etc, etc.

Of course there are risks in every alternative - I'm not going to assess them in this post as they vary case by case & many have been discussed previously in the forum.

Cheers,

Aceyducey

 

[Sunfish]

Moving onto other solutions, it does depend on the level of equity you have and the level of income you desire. If you are more conservative in your income requirements or have a very large portfolio, selling a few properties to pay off the rest and then living off rental income is a possibility.

That would be my Plan A.

T

 

[JumJones]

Great topic - this should be a part of every serious investors gameplan. What is the endgame, what are the alternatives, what is plan A, B, C .. (Z?).

My endgame comes in two parts:

1) I plan on being so good at what I do, I wont have to spend much time doing it. Time is my most important asset (corny I know, but we all know its true)

2) The investment machine I build will fuel itself indefinitely regardless of cycles, or my input. Any input I have will add onto this base. Every part of the machine must sustain itself - I intend creating a legacy, not just a personal indefinite income stream for me to spend. This part is what the original post was about - my machine would only sell assets that were or are likely to underperform. Everything else I keep, otherwise I wouldnt have bought it.

Am I there yet? No. Will I? Yes.

What is your endgame? I would love to hear them.

 

[keithj]

Like many investors in this forum, I intend to accumulate wealth through investment properties, with the intention to live from the income from the investment properties at the end.

I DON'T believe residential property is the ONLY answer. I think it is too low yielding, therefore I need to build up more assets before I can live off the yield, therefore I would have to wait longer to retire.

Holding on to low yield properties does not seem to be the ideal scenario to me. Has anyone considered the options? I would like to hear your thoughts on this.

V. good question HK. When you are retired you need cash to spend.
It could come from -
-annuity,
-residential rents,
-commercial rents,
-quality share dividends,
-property trust dividends,
-borrowing against existing equity,
-selling assets to live on
-3rd party managed business

Some Pros & Cons
- annuities reduce equity & are low yielding, and increase debt, guaranteed
- residential property is usually low yielding with a reasonable growth, lower vacancy risks can be diversified
- commercial property is usually higher yielding with a low capital gain, higher vacancy risks can be diversified
- property trusts - high yielding, low volatility, yield increases roughly with inflation, relatively stable, liquid
- borrowing against existing equity - increases debt, interest rate risks, guaranteed
- selling assets to live on - you'll run out of assets eventually, guaranteed
- managed business - possibly riskier & more paperwork

Questions I ask myself -
What are my goals ?
Do I want to leave anything to the kids ?
What risks do I want to take - interest risk, vacancy, liquidity & lots more ?
What yield do I want ?
Do I want my equity to increase at inflation or otherwise ?
Will I reduce my equity to live on ?
How much do I want to rely on one form of income ?
Do I want to maintain some debt ? At what LVR ?
Will I need cash to upgrade PPOR, yacht, holiday home ?

My goals.
I want to have diversified income streams and I want them now.
So high yielding, low risk & reliable investments is the way to go.
I also want a low LVR (33-50%) and I want to fix rates for as long as possible to reduce that risk.
I don't intend to live off capital (annuities, selling assets).
I want my income to increase at more than inflation.
I want some liquid assets, so if interest rates do skyrocket I can sell to pay off debt or upgrade the yacht.

So for me, some res property, some LPTs, some quality yield based shares is the answer.

 

[lissie]

Just before retirement I was planning on raising an 80% LOC on my investment properties - assuming they were paid off & I had $1M in equity that would leave me with a LOC of $800k - say I then draw down $40k to live - this is tax free but I will have to pay interest on it - say 8% (say $3k) At the end of year 1 I therefore have a LOC of $757k but hopefully the equity has gone up ! This seems cheaper and more flexible than an annuity - the bank shouldnt have a problem with my lack of employment so long as dont exceed the credit limit surely ? Depending on capital growth it should be sustainable - alternatively one might have to seel property every now and then . What's the catch - its seems too easy !

 

[keithj]

What's the catch - its seems too easy !

Hi Lissy,

Interest risk - what if they go back up to 17% ?
Vacancy Risk,
Low/no capital growth risk,
What happens after 11 years - will the bank top up your LOC ?
Uneven growth - property usually steps up in value occasionally. Would you sleep at night if there was no growth for 5 years ?

They are some risks. Some of them can be reduced. There may be a <1% chance of some of these actually happening - but I'd sleep better at night if I was living off yield, and maybe live off equity as a backup plan if the yield plan failed.

KJ

 

[MJK]

My 2C,

I like a combination approach,

That is having some high yeilding assets paid off ( ie commercial ). This would provide the base income. To get this paid off some selling of houses would be required because although the commercial is positive cash flow the pay off rate is too slow.
Then also having some capital growth residential properties that I can draw the equity out of for extra income ie. live of capital and sell occasionaly in the booms to increase the base income.
Also I like to have one project property close to home as a reno to keep me busy.

Summary: Buy 1-2 commercial and 8 houses. Sell four houses to pay off one commercial. Keep four houses for equity growth, drawdowns and security borrowing. Reassess when I get to this point as what to do next.
( note it would take four years to sell four houses to spread capital gains over 4 years )

MJK

 

[Brenda Irwin]

As my portfolio grows, I continually assess my properties and make note of those which are great renters with no vacancies, those which constantly seem to require maintenance, and those which are costing lots of interest but have achieved great capital growth.

Over time, I will weed out the wheat from the chaff and sell a number of properties of bad form and use the money to reduce my debt. That in turn will reduce the amount of interest, hopefully the amount of maintenance, and give me a nice little income to live on.

Trouble is, is that enough or should I be thinking of something much bigger?
The gurus say to stick to what you know and others say to think outside the square. I admire Donald Trump for his lofty ambitions which would scare me, but he seems to thrive on it all.

I know I have to have an end goal in my mind so it can then happen. My end goal is to have bought 100 houses in my investing career. Only 73 more purchases to go.

 

[House_Keeper]

Thank you all for your valuable input.

You have given me many more options that I originally considered. I need to do a bit more research & thinking into it now. Doing Steve Navra course seems to be a good idea, his courses seem to be good value and not overpriced. Not matter how much you know, there is still so much more to learn....

Thanks again,