Should I invest in stocks or keep invested in commercial property?

[qprjames]

Sorry not quite sure which forum listing this should be under.

I am just trying to work out my future plans, but not quite sure the best route to take. I have an investment property (freehold motel) passive investment conservatively valued at 1.1 million. It has a 400k loan attached to it. It creates gross annual income of 96,000. The lease is in place for the next 30 years but can be sold anytime (assuming I have a buyer in place).

My alternative option would be to sell the motel, pay off the loan and have 700k cash to put into the stock market (I don't want to borrow anymore just to invest). The problem is (and perhaps it is a good problem to have given my financial situation) is that my current employment is only paying 30k a year and I will forever be a low income earner (I am late 30's) given I only want to be in low paid unskilled jobs with no stress or commitment after a stressful 10 years of working putting the motel on the map so to speak.

Should I just keep on with the property I have or look instead towards some high dividend yield stocks? I don't see the property going up much in value. If I had stocks, I'd probably be more interested in the annual return than the long term growth in value of the stock.

What would you if you were in my shoes? Or is this question just too vague?!

 

[Value Collector]

Sorry not quite sure which forum listing this should be under.

I am just trying to work out my future plans, but not quite sure the best route to take. I have an investment property (freehold motel) passive investment conservatively valued at 1.1 million. It has a 400k loan attached to it. It creates gross annual income of 96,000. The lease is in place for the next 30 years but can be sold anytime (assuming I have a buyer in place).

My alternative option would be to sell the motel, pay off the loan and have 700k cash to put into the stock market (I don't want to borrow anymore just to invest). The problem is (and perhaps it is a good problem to have given my financial situation) is that my current employment is only paying 30k a year and I will forever be a low income earner (I am late 30's) given I only want to be in low paid unskilled jobs with no stress or commitment after a stressful 10 years of working putting the motel on the map so to speak.

Should I just keep on with the property I have or look instead towards some high dividend yield stocks? I don't see the property going up much in value. If I had stocks, I'd probably be more interested in the annual return than the long term growth in value of the stock.

What would you if you were in my shoes? Or is this question just too vague?!

Hi,

What are your holding costs? I am guessing you have to pay around $19,000 in Interest, but do you responsible for other outgoings or does the tenant pay them.

Basically the way I would look at it is to compare the cashflow you currently receive from your $700K equity to cashflow you will receive by having that invested in another investment.

Things to think about are.

1, How much income does the equity produce where it is, after allowing for any big capital expences in the future.

2, How much capital will you have if the property is sold after paying Agents fees, legals, Capital gains tax etc.

3, what sort of return will you get in an alternative investment.

4, Would being able to take out some of the capital along the way be useful.


If you weren't going to lose to much of the capital to taxes and fees, I would suggest investing it in an ASX200 index fund, like IOZ.

The reason I would suggest that is that you should earn a franked dividend of around 5%, and both the capital and the dividend should grow over time, you will also have the ability to sell off some of the capital as needed, where as you can't sell of a motel room easily.

Not to mention that you won't have any bills coming I for big upgrades or maintenance as you would with the motel, your risk is spread across 200 large companies rather than 1 single piece of real estate.

If you put the $700K into the index you would earn about $35,000 in tax free dividends (with no further outgoings), and you could sell 2% of the capital each year giving you another $14,000 even with the 2% sale each year you total capital invested should continue to rise.

 

[tech/a]

Couple of other thoughts
(1) Could the motel ever be knocked off by competition
(2) become obsolete

Could it be sold as a business

If yes to any or all
I personally would sell

Just another angle

 

[Junior]

Couple of other thoughts
(1) Could the motel ever be knocked off by competition
(2) become obsolete

Could it be sold as a business

If yes to any or all
I personally would sell

Just another angle

Agreed.

Having all of your capital tied up in one illiquid asset, could become an issue given that you are relying on the income to survive. Having that level of debt may impact your borrowing capacity, should you need to obtain credit in future.

Better to liquidate and spread your capital across a range of assets with better liquidity, and which generate a reliable yield. You can achieve this via the share market.

 

[Toyota Lexcen]

can you stomach losing money on the sharemarket?

your 700k could go down significantly

 

[qprjames]

Couple of other thoughts
(1) Could the motel ever be knocked off by competition
(2) become obsolete

Could it be sold as a business

If yes to any or all
I personally would sell

Just another angle

No the motel will always hold up in the market it is in. The business itself has been sold but I kept hold of the freehold property itself in my name. The income I receive is just annual rental from the current tenant who is leasing the property.

 

[qprjames]

can you stomach losing money on the sharemarket?

your 700k could go down significantly

I am not a big risk taker, so perhaps something that tracks the asx 200 rather than picking individual stocks would be a less risky approach? Are there any products which you could advise?

 

[qprjames]

Agreed.

Having all of your capital tied up in one illiquid asset, could become an issue given that you are relying on the income to survive. Having that level of debt may impact your borrowing capacity, should you need to obtain credit in future.

Better to liquidate and spread your capital across a range of assets with better liquidity, and which generate a reliable yield. You can achieve this via the share market.

I’m not worried about the impact on borrowing capacity. I don’t want to have any debt going forward so after this motel loan is paid off, I won’t be looking to borrow again. I do agree with your aspect of a more ‘reliable yield, and ‘spreading of asets’ Would help me sleep better at night?!

 

[qprjames]

Hi,

What are your holding costs? I am guessing you have to pay around $19,000 in Interest, but do you responsible for other outgoings or does the tenant pay them.

Basically the way I would look at it is to compare the cashflow you currently receive from your $700K equity to cashflow you will receive by having that invested in another investment.

Things to think about are.

1, How much income does the equity produce where it is, after allowing for any big capital expences in the future.

2, How much capital will you have if the property is sold after paying Agents fees, legals, Capital gains tax etc.

3, what sort of return will you get in an alternative investment.

4, Would being able to take out some of the capital along the way be useful.


If you weren't going to lose to much of the capital to taxes and fees, I would suggest investing it in an ASX200 index fund, like IOZ.

The reason I would suggest that is that you should earn a franked dividend of around 5%, and both the capital and the dividend should grow over time, you will also have the ability to sell off some of the capital as needed, where as you can't sell of a motel room easily.

Not to mention that you won't have any bills coming I for big upgrades or maintenance as you would with the motel, your risk is spread across 200 large companies rather than 1 single piece of real estate.

If you put the $700K into the index you would earn about $35,000 in tax free dividends (with no further outgoings), and you could sell 2% of the capital each year giving you another $14,000 even with the 2% sale each year you total capital invested should continue to rise.

Hi value collector,

Thank you for your detailed response. You brought up some good points. As far as the comparison goes, I can only say that I receive around $90,000 a year in rental income. The loan repayments are around $10,000 per year. Once land tax has been paid and assuming I haven’t had to pay for any ‘structural repairs’ which I would be liable for, my income from this commercial property stands at around $75,000. So this would be quite a bit higher than your estimated income of $35,000 plus $14,000 from sale of capital (could you elaborate on how this sale of capital would work? I assume this just means selling off 2% of your share portfolio each year?).

Also, you mentioned IOZ as a ASX200 index fund. How many index funds are there that I can choose from. In reality, with 700k to invest, I imagine 500 would be put into an index and 200 into some kind of managed portfolio.

 

[Value Collector]

Hi value collector,

Thank you for your detailed response. You brought up some good points. As far as the comparison goes, I can only say that I receive around $90,000 a year in rental income. The loan repayments are around $10,000 per year. Once land tax has been paid and assuming I haven’t had to pay for any ‘structural repairs’ which I would be liable for, my income from this commercial property stands at around $75,000. So this would be quite a bit higher than your estimated income of $35,000 plus $14,000 from sale of capital (could you elaborate on how this sale of capital would work? I assume this just means selling off 2% of your share portfolio each year?).

Also, you mentioned IOZ as a ASX200 index fund. How many index funds are there that I can choose from. In reality, with 700k to invest, I imagine 500 would be put into an index and 200 into some kind of managed portfolio.

Will you get to keep all that net income though, or are you responsible for large maintenance, like replacing hot water systems etc, roof etc.

With the asx 200 index, the $35,000 return is yours to keep, not tax(due to franking), no maintenance, no outgoings etc.

 

[qprjames]

Will you get to keep all that net income though, or are you responsible for large maintenance, like replacing hot water systems etc, roof etc.

With the asx 200 index, the $35,000 return is yours to keep, not tax(due to franking), no maintenance, no outgoings etc.

Yes I keep 100% of the net income. All maintenance is covered by the tenant. I am only in charge of major structural repairs, but these ‘should’ covered by insurance. So are you saying the whole $35,000 is tax free? Or just taxed at a lower front (pardon my ignorance, but I haven’t educated myself on the subject of ‘franking’ yet).

Secondly, you mentioned that I could sell 2% of the capital each year which would earn me an additional $14,000 based on my 700k investment. Once again, I am unsure how you get to this figure?

 

[tech/a]

can you stomach losing money on the sharemarket?

your 700k could go down significantly

Very true
But unlike property you can sell $700k on the market with the click of a mouse.
You have more direct control.
Ideally an investment in both.

Everything we do financially has a risk
The best we can do is quantify and minimise risk to the best of our ability
We won’t always be right
But you only need to get it really right once to be life changing!
Twice to be secure and
Three times your showing off!!!

 

[Value Collector]

So are you saying the whole $35,000 is tax free? Or just taxed at a lower front (pardon my ignorance, but I haven’t educated myself on the subject of ‘franking’ yet).

Dividends you get will largely be "Franked", which means they come with a tax credit of 30%, So they have already been taxed at 30%, so when comparing dividends to other income streams you have factor that in.

Also not all earnings are paid as dividends, so the index will return a capital gain over time.

the other thing to remember is your property returns may be artificially high due to debt, e.g. you are currently borrowing money at a lower rate than you are earning, if interest rates rise over time, this could squeeze your profit margin,

Work out what you earnings would be if your $700K was invested in the property on an unleverged basis, also work out what you would be earning at various interest rates.

Secondly, you mentioned that I could sell 2% of the capital each year which would earn me an additional $14,000 based on my 700k investment. Once again, I am unsure how you get to this figure?

Over time the Index will deliver you return in two ways.

1, Steady dividends every 3 months.

2, irregular capital gains.

you will earn around 5.5% in dividends and 4% in capital growth on average over time, So you can take out some of that capital growth each year by just selling some of your units.

I was just suggesting 2% which would be around $14,000 at the beginning, but you could do 3% or 1% or what ever you like.

 

[Value Collector]

Ideally an investment in both.

I Agree.

It sounds like he has a good property, I would probably keep it, and set it up so 25% of the net monthly earnings dollar cost averaged into the ASX200 index, So over time he builds up a more diversified income stream made up of a rental check and franked dividends.

The Index fund also creates a pool of liquidity for rainy days to draw on, if rain ever set in and he needed to reach for a $100K at short notice for some reason.

 

[Redbeard]

Having owned both, shares and commercial properties. I would stick with the Commercial property. You are getting most of your outgoings paid by the tenant, unlike residential. You will also be getting expenses and depreciation (building and fittings ) deductions on your tax. And you know exactly what you are getting as its in your lease. If you buy shares its all up to a board of directors and they change their mind all the time. DRP this year , next year No. Franking 100% this year next year 40%, Sell off part of the company and 'return capital' to you, etc etc
i have always viewed shares as a place to park small amounts of money until I have enough to buy another property (50% deposit). Some will tell you that you can get 7% return and 3% capital growth( just picking numbers) but you have to pick the right stocks. Just look at CBA, BHP and other shares over the last 10 years. Up and down , up and down. And in the case of Telstra ,, going going ..
Are you comfortable with having your investment in stocks vary by 50,000 in a day!!

Also you get rent paid monthly. Share dividends are paid 6 monthly. So if you are relying on it to supplement your income, shares makes it hard.
What I would suggest is take half the rent as income and with the other half buy shares or put it in a super fund and buy shares.
you really need to sit down with your tax return and work out how much income you are really generating and then try to do a comparison with the stocks you like. But you have to do it by making a "mock" tax return. with all the inclusions and deductions.
Stocks are easy , buy and forget.. But owning property is like running a business, and you have to treat it as so. If your accountant is doing his job properly you should have a very good tax return.

 

[Value Collector]

You will also be getting expenses and depreciation (building and fittings ) deductions on your tax.

Yes, but those are real expenses, that one day need to funded with real cash, so in reality part of the income you are receiving is a capital return, hence why its not taxable, its your own capital you are getting back.

Some will tell you that you can get 7% return and 3% capital growth( just picking numbers) but you have to pick the right stocks.

I recommended and ASX index, thats going to be the best option for some one not able to pick their own shares.



..

Are you comfortable with having your investment in stocks vary by 50,000 in a day!!

Exactly the same thing happens in property, you just don't pay attention to it.

If each day you called your real estate agent and asked him to have a purchase contract signed by lunch time, you can beat the price your property would sell at would move around a lot more than $50,000 each day.

But on the days the price was too low, you would just ignore the market and say "My property is worth more", thats how you should act with the share market also.

Also you get rent paid monthly. Share dividends are paid 6 monthly. So if you are relying on it to supplement your income, shares makes it hard.

the index pays 3 monthly.

But all you have to do is have an account that all dividends are paid into, like a big bucket of cash, and then pay yourself a wage weekly.

So it doesn't matter if the dividends, are paid yearly, your wage is paid weekly from your bucket

.

 

[qprjames]

Yes, but those are real expenses, that one day need to funded with real cash, so in reality part of the income you are receiving is a capital return, hence why its not taxable, its your own capital you are getting back.




I recommended and ASX index, thats going to be the best option for some one not able to pick their own shares.



..


Exactly the same thing happens in property, you just don't pay attention to it.

If each day you called your real estate agent and asked him to have a purchase contract signed by lunch time, you can beat the price your property would sell at would move around a lot more than $50,000 each day.

But on the days the price was too low, you would just ignore the market and say "My property is worth more", thats how you should act with the share market also.



the index pays 3 monthly.

But all you have to do is have an account that all dividends are paid into, like a big bucket of cash, and then pay yourself a wage weekly.

So it doesn't matter if the dividends, are paid yearly, your wage is paid weekly from your bucket

.

Thanks value collector for your help on this thread I’m going to sit down with the accountant, go through a few possible scenarios and work out which would suit me best financially. In the meantime I’m going to dip my feet into trading on an index fund, just so I’m ready to invest some serious money if I decide to offload the commercial property.

 

[Value Collector]

I’m going to dip my feet into trading on an index fund,.

Forget about "Trading" the index, just steadily accumulate the index over time, through all the ups an downs, and just hold it, just like you are holding your property.

don't try and by and sell, just buy, and if the index drops think of that as a good time to get more, intact if you are buying every month, you should want the index to fall, so each purchase buys you a bigger piece of Australian Business.

Here is how the worlds greatest investor thinks about the market going down and how you should react.

watch the first couple of minutes of this video.

 

[tech/a]

VC

Whats your thoughts on finding stock which crashes very quickly
Provided its a solid stock just buy it?
Is it a matter of what made it crash lower or in your view doesn't that matter?
I would suggest if its clear that iy was an outside influence like the GFC that's nirvana!

 

[qprjames]

Forget about "Trading" the index, just steadily accumulate the index over time, through all the ups an downs, and just hold it, just like you are holding your property.

don't try and by and sell, just buy, and if the index drops think of that as a good time to get more, intact if you are buying every month, you should want the index to fall, so each purchase buys you a bigger piece of Australian Business.

Here is how the worlds greatest investor thinks about the market going down and how you should react.

watch the first couple of minutes of this video.

Forget about "Trading" the index, just steadily accumulate the index over time, through all the ups an downs, and just hold it, just like you are holding your property.

don't try and by and sell, just buy, and if the index drops think of that as a good time to get more, intact if you are buying every month, you should want the index to fall, so each purchase buys you a bigger piece of Australian Business.

Here is how the worlds greatest investor thinks about the market going down and how you should react.

watch the first couple of minutes of this video.

Yes I was look8ng to accumulate over time rather than buy and sell. Perhaps I didn’t word my last statement very well. And yes in an ideal world I would be buying gradually in a dropping market. For my situation, I would love a stock market crash next week, but I probably shouldn’t say that too loudly otherwise I might not be too popular in this forum! Lol