Un-leveraged Residential Property - A DUD Investment?

[JIT]

I still think you don't go from working / investing to full retirement.

Neither do I.

More likely, you slowly transition from capital to income, and then after a while you realise the income is enough for you to 'live'.
Alex

I'm just saying that you really need to plan for this and use a bit of foresight to make it happen effectively.

I'd say a lot of investors here have the overwhelming majority of their investment portfolios in residential property, but at some point in time a decision needs to be made as to when they shift more of their free income towards investing in income-producing assets, rather than sustaining or building on growth assets.

If your growth strategy was very, very successful though - you might be in a position where the yield on these growth assets (eg. residential property) is sufficient for you to live off, and so the transition to income producing assets is less onerous (but, this is still an ineffective use of the residential property asset class).

 

[alexlee]

I'd say a lot of investors here have the overwhelming majority of their investment portfolios in residential property, and at some point in time a decision needs to be made as to when they shift more of their free income towards investing in income-producing assets.

If your growth strategy was very, very successful though, you might be in a position where the yield on these growth assets are sufficient for you to live off and so the transition to income producing assets is less onerous.

For me personally, what I'm seeing is that I'm going to get into small developments. I'll hold them for rent and capital appreciation at the start. Then as my experience grows and can do more faster, I'll start selling them and putting the profits into shares, bonds, etc. I also expect as my experience grows to have opportunities to invest in other businesses.
Alex

 

[VYBerlinaV8]

In the growth vs yield debate, I get kinda confused. It seems to me that a smart combination of both is what is needed. I know a number of successful property investors, and yet even they seem to say 'yield is not important'. That surprises me, as yield is what is driving my ability to acquire more and more properties, and effectively not pay for them myself.

Also, if you incorporate yield into your considerations (ie not just growth), then I think you're in a much better position to plan your retirement/support strategy, which, ultimately, is about generating an ongoing cashflow to live off.

 

[alexlee]

In the growth vs yield debate, I get kinda confused. It seems to me that a smart combination of both is what is needed. I know a number of successful property investors, and yet even they seem to say 'yield is not important'. That surprises me, as yield is what is driving my ability to acquire more and more properties, and effectively not pay for them myself.

Also, if you incorporate yield into your considerations (ie not just growth), then I think you're in a much better position to plan your retirement/support strategy, which, ultimately, is about generating an ongoing cashflow to live off.

Maybe if you regularly renovate, develop and sell, yield isn't a big deal because your serviceability comes from profits from sales and equity-lends from value added renos?
Alex

 

[JIT]

Maybe if you regularly renovate, develop and sell, yield isn't a big deal because your serviceability comes from profits from sales and equity-lends from value added renos?
Alex

But where's the passive income in this, aren't you just replacing one job with another, albeit one with a higher income and perhaps more enjoyable for you (not that there's anything wrong with that)?

 

[alexlee]

But where's the passive income in this, aren't you just replacing one job with another, albeit one with a higher income and perhaps more enjoyable for you (not that there's anything wrong with that)?

That's probably true, but I would think, for example, you can plow the profits from property developing into shares and paying off the debts on your own portfolio, so that eventually you end up with a low enough LVR to generate passive income?
Alex

 

[JIT]

That's probably true, but I would think, for example, you can plow the profits from property developing into shares and paying off the debts on your own portfolio, so that eventually you end up with a low enough LVR to generate passive income?
Alex

If you switch to higher yielding investments eg. dividend paying shares then yes.

But if you just pay down your residential property portfolio to a low or nil LVR and use this as passive income...then that comes back to my original point about 'un-leveraged' (/very low leverage) residential property being a DUD investment (due to the low yield)...particularly in retirement when you need this passive income (as Sunfish added)...

And just another thought, it would be interesting to do a poll here to see what % of your gross assets are accounted for by residential property...

If you're nearing retirement, and it represents a large proportion...I would say more than 60% of your total portfolio value in a growth asset (eg. residential propety or also shares) is large at the retirement stage...then I think you're really behind the 8-ball and that you're portfolio is very 'out of balance'...

Any further thoughts on this point...

Whose in this boat right now??

 

[BayView]

And just another thought, it would be interesting to do a poll here to see what % of your gross assets are accounted for by residential property...

If you're nearing retirement, and it represents a large proportion...I would say more than 60% of your total portfolio value in a growth asset (eg. residential propety or also shares) is large at the retirement stage...then I think you're really behind the 8-ball and that you're portfolio is very 'out of balance'...

Any further thoughts on this point...

Whose in this boat right now??

JIT,

What else would the portfolio be in? there's only businesses, cash (we know what happens to cash over time). Precious metals and art (no income from these two), or royalites from books etc?

I'm 46. Already "retired" but will never stop working in some form. Businesses are my go. Ready to go again.

Percentage of gross assets in:
Residential Investment Property: 89% (LVR 58%).
Superannuation: 10%
Shares: 1%. (no finance)

I don't see a problem.

The plan is to do similar to Alex; use the property to do some development, but with the goal of selling a few units off and keeping one with each development. These will be cfp from completion after the others are sold.

Part of the equity will be used for buying another business or businesses, and/or some commercial realestate like Dazz.

On retirement (read; really old ba$tard), sell part of the portfolio to retire the debt and live off the passive income from the businesses and the rents. No pension for me.

Supplement with more LOE if needed. (we do this now).

The bottom line will be a good chunk of passive income, with assets increasing in value underpinning the income.

 

[alexlee]

I just can't really imagine myself sitting on a couple million in equity, living like a pauper and wondering 'I wish I know how to turn this into cashflow'.
Alex

 

[Sunfish]

I didn't want to get involved here because I think shares are the No.1 retirement investment (surprise, surprise) and I doubt you want me talking them up on a property forum, again.

But you guys have been dancing around them and their franked dividends. JIT is closest to my thoughts but I could add that if you buy them early, growth stocks can become income stocks as they mature. You may not have to sell anything. Nor am I so hard that I would say you should be out of property when you retire. Why not sell a property every year or so after retirement, spreading the CGT and freeing cash to reinvest and to live on?

I would absolutely never advocate a wholesale sell-down of any asset class and dumping the proceeds into another. Positions should be built up over time as knowledge and confidence builds and according to the investment clock.

Remember, I'm already of retirement age (started too late) so my thoughts on this are more immediate, and maybe more practical.

 

[JIT]

I just can't really imagine myself sitting on a couple million in equity, living like a pauper and wondering 'I wish I know how to turn this into cashflow'.
Alex

Perhaps you missed all the posts by people in similar situations...?

If you can't think how to do this now, how is $2MM equity going to change things?

There's no real 'secrets' to how you do this anyway, just planning and foresight.

...but I could add that if you buy them early, growth stocks can become income stocks as they mature. You may not have to sell anything.

I agree, and in the same way, a residential property that was initially a growth asset may in time be relatively higher yielding (but I base this on present value, not purchase price), or, the overall growth may have been so huge that the associated income stream is also very high.

Nor am I so hard that I would say you should be out of property when you retire.

Yes, me neither.

Why not sell a property every year or so after retirement, spreading the CGT and freeing cash to reinvest and to live on?

Yes.

I would absolutely never advocate a wholesale sell-down of any asset class and dumping the proceeds into another. Positions should be built up over time as knowledge and confidence builds and according to the investment clock.

Absolutely.

I'm very interested to hear from others here what % of your total assets/investments are in residential property, particularly for those who are say 5 years to retirement....

 

[alexlee]

Perhaps you missed all the posts by people in similar situations...?

If you can't think how to do this now, how is $2MM equity going to change things?

There's no real 'secrets' to how you do this anyway, just planning and foresight.

Sure to do it efficiently you'll need planning. But one absolutely dumb-as* but effective way would be to just sell everything, get all the equity in cash and buy decent yielding shares with franked dividends. Not very tax efficient, but it's one way to turn equity into income.

I know how to turn a couple mil in equity into cashflow now: it'll take more planning to do it without paying a heap of tax, though.
Alex

 

[JIT]

Now here's an example of what I'm talking about in an interesting but un-loved thread, and it is essentially about asset allocation:

http://www.somersoft.com/forums/showthread.php?t=23692

From this thread:

Gross Value

Income type funds (inc. Commercial Property Funds): 12%
Direct Residential Property: 43%
Direct Shares: 22%
Growth type funds: 18%
Cash/Gold: 1%
Super: 4%

Note: the Direct Residential Property includes PPOR.

Now I don't know much about Y-man, apart from his great posts, but it's interesting to note the gross value of direct residential property in his portfolio is just 43%....

 

[Ausprop]

am really enjoying this thread. I have been bashing away for years doing resi IP developemnts, flipping etc, yet whilst the balance sheet was looking great the monthly P&L was almost embarassing. whilst being torn between being a B&H'er and a developer (and the tax implications of that) I have come to the realisation of needing to relax a little, churn some, hold some, get into CP, get into shares (both of which have been doing very nicely, CP particularly as there is value creation there rather than just retail shopping). the end result should be a nice mix of resi IPs, CPs, shares, premium property (PPOR and beach house)... not much more a guy can do really.

sounds like the answer is yang and yang - keep it balanced!

 

[The Y-man]

...it's interesting to note the gross value of direct residential property in his portfolio is just 43%....

I personally feel 43% is still high.... targeting <30%

Cheers,

The Y-man

 

[JIT]

I personally feel 43% is still high.... targeting <30%

Cheers,

The Y-man

Thanks Y-man.

My rough figure at retirement might be close to 60% for property & shares (ie. growth assets) combined, so maybe 30% each.

 

[JIT]

Percentage of gross assets in:
Residential Investment Property: 89% (LVR 58%).
Superannuation: 10%
Shares: 1%. (no finance)

I don't see a problem.

There isn't necessarily a 'problem', it depends what the gross yield on your property portfolio is as well as the net yield after costs and interest...

 

[alexlee]

There isn't necessarily a 'problem', it depends what the gross yield on your property portfolio is as well as the net yield after costs and interest...

And what stage you're in. Mine looks like (on gross):
Cash 2%
Shares 9%
Resi prop 89% (LVR 61%)

Overall cashflow (excluding my salary, of course) is negative. I'm aiming for growth at this stage. Income can wait.
Alex

 

[JIT]

And what stage you're in. Mine looks like (on gross):
Cash 2%
Shares 9%
Resi prop 89% (LVR 61%)

Overall cashflow (excluding my salary, of course) is negative. I'm aiming for growth at this stage. Income can wait.
Alex

Yes, that's right, I'm also in the growth stage.

A few more working years ahead of me yet, just doing a bit of forward planning now...

It's really just about how to best use different asset classes at different stages of your investing life.

 

[keithj]

But if you just pay down your residential property portfolio to a low or nil LVR and use this as passive income...then that comes back to my original point about 'un-leveraged' (/very low leverage) residential property being a DUD investment (due to the low yield)...particularly in retirement when you need this passive income (as Sunfish added)...

I'd agree that IP is usually an inefficient way of generating retirement income - I'm not sure if you've read this thread which asked the same question.

And just another thought, it would be interesting to do a poll here to see what % of your gross assets are accounted for by residential property...

If you're nearing retirement, and it represents a large proportion...I would say more than 60% of your total portfolio value in a growth asset (eg. residential propety or also shares) is large at the retirement stage...then I think you're really behind the 8-ball and that you're portfolio is very 'out of balance'...

Whose in this boat right now??

My asset alloc by Jan '08 will be -
IP & PPOR 33%
Shares 67%
Super < 0.5%

...and on an income basis
IP 5%
Shares 94%



I'd be wary of taking on board to much of Travis Morien (who I have a lot of respect for) - he's catering for the 'average' investor/retiree - anyone with multiple IPs will be way above that.



The problem with retirement asset allocation is that the share/IP cycle takes around 7-10 years from peak to peak. Transitioning between asset classes is best done in a small window during this cycle and that window isn't likely to coincide with your retirement plans.


My view is to have as big an asset base as possible & keep it in balanced growth assets with a reasonable yield. Don't sell when retirement approaches.

In the growth phase leveraging up using IP will eventually create servicability problems. Buying reasonably yielding shares (at the right time in the cycle) instead of low yielding IP will help servicability. Share incomes grow with their share price (that's what the P/E ratio is all about), so share income may be expected to grow at around 7%pa, rents usually grow at around half that. So the portfolio tends to be c/f neutral (or slightly -ve).

So when it's time to retire, the portfolio is already diversified, balanced, and reasonably yielding and is likely to be generating a reasonable income, have reasonable growth, and also be suitable for LOE. There's no transition period, it's already got good growth & yield.