What would happen if you sold half of your property portfolio?
If you have a large residential rental property portfolio of five or more rentals, what would happen if you sold half over the next few months?
Seriously think about what would happen:
- Your debt would decrease. How does this fit with your risk profile long term?
- Your passive income and cashflow is likely to get a lot better. Would this meet your long term goals?
- How much less stress and hassle would there be if you sold half your rentals?
Everyone has different aims and goals. In general, your aim should be to have a debt free personal house and passive income. The value of your personal house and the level of passive income depends on you and what you want/need.
- Personal house worth $1m, with $300,000 debt remaining, owned by a Trust.
- Joe has an LTC with 10 Rentals. The LTC is owned by a Trust.
- The 10 properties are worth $500,000 each, with $220,000 debt.
- Or overall $5m rental assets with $2.2m debt.
- Each rental is making around $5,000 per year before tax, and after tax (with some chattels depreciation) is left with $4,200.
- Over 10 rentals this is $42,000 passive income per year.
- Joe is currently working, making $120,000 per annum. After tax, this is $90,000 approximately. $20,000 of this currently goes to his personal home P&I payment, leaving $70,000 that Joe currently lives on, and ideally he wants to keep this level of spending.
If Joe sold 5 rentals, the older rentals that require more repairs and more work in general:
- In simple terms receive $2.5m.
- Repay personal house debt.
- Repay all LTC debt.
- Left with 5 rentals, worth $500,000 or $2.5m overall and no debt.
- Each rental would now be making around $15,000 per year before tax, or $75,000.
- After tax, this would be $60,000 left for Joe to spend.
While this case study doesn’t give Joe his ideal amount of income left after tax, it isn’t far away!
- No longer has to work (I included property management expenses in the rentals).
- Earns $60k after tax, compared to current $70,000.
- Long term, I would work towards holding newer properties that attract better tenants, have less repairs and overall are less hassle. If this is done, then Joe will also have less hassle.
Joe might be able to renovate properties slightly to improve rent, or add a minor dwelling or two, or do other simple things to get the extra income, or he might be close to 65 years old and receive the pension.
I hope that whatever position you are in, you work through how this would work for you. There are lots of property investors who can do this now, and achieve the outcome that they want! It is all about the outcome that is right for you. Some property investors want more and more and more. Others are happy just with a reasonable passive income and being able to retire early with no debt and no hassle. There isn't a right or wrong way!
As always, make sure you get expert advice before selling any properties, to ensure there are no tax implications!
By Ross Barnett - Property Accountant
Property Accountant | New Zealand
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
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