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Selling An Investment Property To Unlock Cash Flow · My Accounting Advantage

• 0:03
  SPEAKER_00: Hello and welcome back to the podcast My Accounting Advantage.
• 0:07
  SPEAKER_00: My name's Lee Woodward, your coach and host, and joining us today for another brilliant topic is Mai Harris.
• 0:13
  SPEAKER_00: My welcome back.
• 0:14
  SPEAKER_00: Thank you, Lee.
• 0:15
  SPEAKER_00: How did you enjoy hosting last week?
• 0:17
  SPEAKER_01: It's quite different.
• 0:18
  SPEAKER_01: And I do like being interviewed rather than being on the other side of the microphone, to be honest.
• 0:25
  SPEAKER_00: It's interesting that what's your knowledge path?
• 0:27
  SPEAKER_00: So when it comes to taxation, financials, spreadsheets, I'm out.
• 0:32
  SPEAKER_00: But as a business owner, I've got the questions that you have the knowledge to.
• 0:37
  SPEAKER_00: And then in marketing, it's a different side of it again.
• 0:40
  SPEAKER_00: But let's go into today's topic.
• 0:42
  SPEAKER_00: Should you sell an investment property to build more wealth?
• 0:46
  SPEAKER_00: Take us into this one.
• 0:47
  SPEAKER_01: Yes, so this one is stemming from a real life scenario.
• 0:52
  SPEAKER_01: And a lot of people, you know, we grow up in Australia knowing that the ultimate dream is actually owning properties.
• 1:01
  SPEAKER_01: But the mentality is on owning properties is number one, I just want to keep it all.
• 1:07
  SPEAKER_01: I don't want to sell it.
• 1:08
  SPEAKER_01: I just want to keep earning and getting more property under my belt.
• 1:13
  SPEAKER_01: So it's more almost like a status thing that the more property you have, the more wealthy you are.
• 1:19
  SPEAKER_01: Sometimes that's not the case because properties do require a lot of cash flows to support the debt servicing.
• 1:28
  SPEAKER_01: And many business owners or many investors that have more than three properties sometimes struggle because if you are heavily debt financing, you need to come up with a lot more cash to be able to service all those debts.
• 1:44
  SPEAKER_00: And that's a lot of pressure, a lot of hassle.
• 1:46
  SPEAKER_00: If you're living this loop, I've just got to hold properties for the sake of it.
• 1:50
  SPEAKER_00: Whereas I just had an interesting situation where a tenant was approved for a two-bedroom unit and the tenant was approved because they've sold their house.
• 1:58
  SPEAKER_00: They're going to be spending that money in their life and they're renting now because they're at that late part of their life.
• 2:03
  SPEAKER_00: I want to travel, I want to do this, I want to do that.
• 2:05
  SPEAKER_00: So they've sold the family home, they're renting something, and they're using that money to live.
• 2:10
  SPEAKER_00: Now, was that the right decision for them?
• 2:12
  SPEAKER_00: I think so.
• 2:13
  SPEAKER_00: Because you can't take it with you.
• 2:15
  SPEAKER_01: No.
• 2:15
  SPEAKER_00: And if you're thinking, but I'm going to leave it to all these people, let them worry about themselves.
• 2:19
  SPEAKER_00: What about you?
• 2:20
  SPEAKER_00: So take us into our case study.
• 2:22
  SPEAKER_01: Yeah, so I had a couple that came and saw me last week, and they're in their early 50s, and they have quite a big mortgage around about$800,000.
• 2:32
  SPEAKER_01: But they have an investment property in Queensland.
• 2:35
  SPEAKER_01: And that doesn't have that much debt because they bought it quite some time ago.
• 2:40
  SPEAKER_01: And they were saying to me, Look, we really want to be able to retire when we turn about 60.
• 2:47
  SPEAKER_01: But at this rate, we just simply can't because our mortgage is too big.
• 2:53
  SPEAKER_01: And we've got two young kids.
• 2:55
  SPEAKER_01: We had kids late.
• 2:56
  SPEAKER_01: What should we do?
• 2:57
  SPEAKER_01: And I said, Well, there's a number of things that you can do.
• 3:01
  SPEAKER_01: Number one, let's have a look at your asset pool.
• 3:03
  SPEAKER_00: Well, they've done one thing, right?
• 3:05
  SPEAKER_01: Yes.
• 3:05
  SPEAKER_00: That's come to see you.
• 3:06
  SPEAKER_01: Yes.
• 3:07
  SPEAKER_00: A lot of people don't.
• 3:08
  SPEAKER_00: So let's good coachable moment, uh, make the appointment.
• 3:11
  SPEAKER_01: That's right.
• 3:11
  SPEAKER_01: And it's basically you shouldn't be suffering in silence, to be honest.
• 3:16
  SPEAKER_01: If you actually can't figure that pathway out yourself, you really need to see an advisor.
• 3:23
  SPEAKER_01: And if that advisor can't provide you with the right direction and you don't feel that you can resonate with the advice, move on.
• 3:32
  SPEAKER_01: Get another another one.
• 3:33
  SPEAKER_01: Don't just do it because you think, oh, that should be okay, because it may not be.
• 3:39
  SPEAKER_01: So anyway, they've done the right thing.
• 3:41
  SPEAKER_01: They came and saw me.
• 3:42
  SPEAKER_01: So I said to them, Well, let's have a look at your asset pool.
• 3:46
  SPEAKER_01: So at the moment, they have an investment property in Queensland, and to me, it has seen its ceiling with the growth potential.
• 3:55
  SPEAKER_01: And it could be sold, and they can utilize the capital growth that is currently trapped in that property to alleviate their pain with their current mortgage.
• 4:07
  SPEAKER_01: So we had a look at that path.
• 4:09
  SPEAKER_01: So what if they were to sell that property in Queensland that would have released about$300,000 from that property, which is a substantial amount of money.
• 4:20
  SPEAKER_01: And what would that do?
• 4:22
  SPEAKER_01: That would actually pay down their current home loan from$800 to$500.
• 4:27
  SPEAKER_01: And the savings on that interest would have been around about$16,000 if we account for an interest rate of 6.5% per year.
• 4:37
  SPEAKER_01: And they are instantly$16,500 richer in cash.
• 4:42
  SPEAKER_01: So at the moment, you've got to think if that property is not producing you$16,500 in capital growth.
• 4:50
  SPEAKER_01: And currently, you know, with the property market the way it is, it isn't.
• 4:54
  SPEAKER_01: And I said to them, is it negative gearing?
• 4:56
  SPEAKER_01: Is it positive gearing?
• 4:58
  SPEAKER_01: It should be positive gearing because you don't have a lot of debt on it.
• 5:01
  SPEAKER_01: And he said, no, not really.
• 5:03
  SPEAKER_01: It's cash neutral.
• 5:04
  SPEAKER_01: So it's breaking even.
• 5:06
  SPEAKER_01: So if it's breaking even, it's not really doing anything for you either.
• 5:10
  SPEAKER_01: Because it's just producing enough revenue to pay for the debt servicing part.
• 5:16
  SPEAKER_01: And what if you sell it?
• 5:17
  SPEAKER_01: You're gonna be$16,500 better off.
• 5:20
  SPEAKER_01: So straight away that will help with the family cash flow.
• 5:24
  SPEAKER_01: So at that point, I got him interested.
• 5:27
  SPEAKER_01: And then he said, Well, what if the property goes up in the next 10 years?
• 5:33
  SPEAKER_01: I said, Well, okay, let's look at it this way.
• 5:37
  SPEAKER_01: You know, the FOMO feeling is coming on here.
• 5:40
  SPEAKER_01: And and to listeners out there, you need to live in the present.
• 5:46
  SPEAKER_01: Don't have this FOMO feeling and anticipating that, oh, I'm going to make so much more money if I keep this property or I keep this investment and then suffering in the meantime while you're waiting for something that hasn't happened and may not happen in the future.
• 6:05
  SPEAKER_01: So you're taking a gamble.
• 6:07
  SPEAKER_01: So I said to him, okay, that's fine.
• 6:09
  SPEAKER_01: So how much more would you anticipate the growth will be for this property?
• 6:13
  SPEAKER_01: He said, Oh, it might be another$100,000.
• 6:15
  SPEAKER_01: I said, Okay, that's fine.
• 6:17
  SPEAKER_01: So it might be another$100,000 that you will gain from the capital growth.
• 6:22
  SPEAKER_01: Maybe, maybe not.
• 6:23
  SPEAKER_01: And let's just say it might be another 10 years.
• 6:26
  SPEAKER_01: And but let's just compare it to the current situation.
• 6:29
  SPEAKER_01: If you were to sell and have the cash to bring down your current home loan, which is your principal place of residence and it's not tax deductible, you're just paying um that interest to the bank.
• 6:41
  SPEAKER_01: And if you bring the loan level down, you're saving$16,000.
• 6:46
  SPEAKER_01: 10 years, you're saving$160,000.
• 6:50
  SPEAKER_01: Not a hundred,$160,000.
• 6:52
  SPEAKER_01: Which one would you take?
• 6:53
  SPEAKER_00: Wow, it's compelling.
• 6:55
  SPEAKER_01: Yeah.
• 6:56
  SPEAKER_01: So then I got him listening and I said, look, let's take it another step.
• 7:01
  SPEAKER_01: So what would you do with that$16,000 cash that becomes available because you're not no longer paying the bank for that for the interest on loan?
• 7:10
  SPEAKER_01: And he said, Oh, what should I do?
• 7:12
  SPEAKER_01: I said, uh, if it was me, I would actually utilize that$16,500 to contribute to super.
• 7:20
  SPEAKER_01: So I show him the calculation.
• 7:22
  SPEAKER_01: And once he actually does that, it will reduce his taxable income down because super contribution is tax deductible, and then reduce his tax quite substantially.
• 7:33
  SPEAKER_01: And instead of not getting a refund for his tax that year, we projected that he will receive about$9,000 tax refund if he was to contribute$16,500 of that cash into super.
• 7:48
  SPEAKER_01: So that's a pretty good deal.
• 7:49
  SPEAKER_01: That's a great return on investment.
• 7:51
  SPEAKER_01: So what happened when your$16,500 hits the super fund?
• 7:56
  SPEAKER_01: It only pays tax at 15%.
• 7:58
  SPEAKER_01: And then your super fund will invest that further.
• 8:01
  SPEAKER_01: So that money's working extra hard for you because not only that it's saving your tax, it will be reinvested.
• 8:09
  SPEAKER_01: So your super balance will be accumulated and earning more money and its compounding effect.
• 8:16
  SPEAKER_01: So by the time that he turns 60, it'll be worth quite a bit of money.
• 8:20
  SPEAKER_01: And then what would you do with the$9,000 in tax refund?
• 8:24
  SPEAKER_01: Well, if he wants to, he actually can choose to contribute more to super for the following year.
• 8:30
  SPEAKER_01: So that's extra tax deduction again.
• 8:32
  SPEAKER_01: However, I said to him, look, you either choose to use that$9,000 tax refund to take the family on a holiday or put it on your home loan and pay that off even further.
• 8:44
  SPEAKER_01: So, all in all, once we actually put that into a scenario and the modeling, that will substantially reduce the amount of time that he can pay his debt off.
• 8:56
  SPEAKER_01: And he doesn't need to work until he's 77 anymore.
• 9:01
  SPEAKER_01: And we actually given him a path to be able to retire at the age around about 60 something.
• 9:08
  SPEAKER_01: So that goes to show just by, you know, sacrificing an investment in that you already have peaked.
• 9:16
  SPEAKER_00: Could have peaked.
• 9:17
  SPEAKER_01: Yeah, it's already peaked.
• 9:18
  SPEAKER_00: Just that, what, 10 years ago?
• 9:20
  SPEAKER_00: That's right.
• 9:20
  SPEAKER_00: 300, gone gone up into the 600s.
• 9:23
  SPEAKER_00: But the other part about this that is sometimes invisible, no more strata levies, no more emails from the agent, the tenants, dunner, whatever it is, you know, life's about reducing stress.
• 9:34
  SPEAKER_00: And I think that's a great example in this strategy of what you've done.
• 9:37
  SPEAKER_01: Yeah.
• 9:38
  SPEAKER_01: And it's so important, you know, to start with the outcome, but not the asset.
• 9:42
  SPEAKER_01: A lot of people really want to hold on to the asset for the sake of holding on to it.
• 9:46
  SPEAKER_01: And if it's not really serving you, don't feel like you need to keep it.
• 9:51
  SPEAKER_01: You don't need to cuddle it at night because it's not going to um give you the return that you need in order to better your life or grow your wealth.
• 10:02
  SPEAKER_00: What powerful advice.
• 10:04
  SPEAKER_00: Start with the outcome, not the asset.
• 10:06
  SPEAKER_00: And you're right, we are all brainwashed to buy all these properties because that's what you do.
• 10:11
  SPEAKER_00: You live off the rent.
• 10:12
  SPEAKER_00: But there's got to come a time that you cash it in and live your life.
• 10:16
  SPEAKER_00: And that is your retirement plan.
• 10:17
  SPEAKER_01: Absolutely.
• 10:18
  SPEAKER_01: So one of the biggest reasons people don't act, like I said before, is FOMO.
• 10:24
  SPEAKER_01: So it's fear of missing out.
• 10:26
  SPEAKER_01: And I see it over and over again.
• 10:29
  SPEAKER_01: So many times that I'm in the client meeting and I hear this.
• 10:33
  SPEAKER_01: What if it goes up?
• 10:34
  SPEAKER_01: And I'm selling now, should have been able to earn more than if I sell now.
• 10:40
  SPEAKER_01: And I'm like, I get what you're saying, but that money hasn't been earned.
• 10:45
  SPEAKER_01: You gotta understand.
• 10:46
  SPEAKER_01: So you need to look at the present and how that asset can actually better your life and better your future.
• 10:53
  SPEAKER_01: And don't try to, you know, hold on to everything because what if?
• 10:59
  SPEAKER_01: Because that time may not come at all.
• 11:02
  SPEAKER_00: There's no box trailers behind a hearst.
• 11:04
  SPEAKER_00: Have you ever heard that one, Mike?
• 11:05
  SPEAKER_01: Yes, I have.
• 11:07
  SPEAKER_00: You cannot take it with you.
• 11:09
  SPEAKER_00: So you know, in real time, and something we've said on the program before, nothing real can be threatened.
• 11:15
  SPEAKER_00: And what you have now is real, but the time is now.
• 11:18
  SPEAKER_00: It's not then, later, what if no, no, it's now.
• 11:21
  SPEAKER_00: What are you doing in the now?
• 11:22
  SPEAKER_00: And with the right advice, this is where it it can all come back, and this is where the strategy improves people's lives.
• 11:28
  SPEAKER_01: Yeah.
• 11:29
  SPEAKER_01: So the financial pressure today versus potential wealth tomorrow, many families become locked into a strategy because they feel they should continue.
• 11:38
  SPEAKER_01: But the reality is that life happens now.
• 11:41
  SPEAKER_01: So I urge everyone to sort of review your financial position.
• 11:45
  SPEAKER_01: And if you're actually not happy with the way it's going, it's time to review and how you can utilize what you have to provide you with more security and reduce the stress and reduce the financial burden potentially for you.
• 12:03
  SPEAKER_00: Mike, give us your closing reflection on today's very important topic.
• 12:07
  SPEAKER_01: So my closing for today is that property is an incredible wealth-building tool, but it isn't the only tool.
• 12:16
  SPEAKER_01: And it isn't always the right tool for every stage of life.
• 12:19
  SPEAKER_01: The best strategy at the age of 40 may not be the best strategy at the age of 60.
• 12:26
  SPEAKER_01: So the question isn't what is my property worth?
• 12:29
  SPEAKER_01: The real question is, is this property helping me achieve the life I want?
• 12:35
  SPEAKER_01: So I just want to leave the listener with that.
• 12:37
  SPEAKER_01: So go and get the life that you want.