Should we sell our investment property and put the money into super?

Should we sell our investment property and put the money into super? My husband and I retired two years ago and have about $700,000 each in super. We live in our paid-up house and have about $50,000 in a savings account. We also have a paid off investment property, earning us about $2000 (less expenses) a month. This property is worth about $700,000. We paid $400,000 for it 10 years ago. My husband is 72 and I am 70.

Thanks for your question, this is one we see a lot. You’ve accumulated wealth through property investment, perhaps using some negative gearing along the way, but at what point should that chapter close?

There is the school of thought that once you buy a property the strategy should be to never sell. But you can’t eat bricks.

Here are some points for you to consider. Firstly, as an income earner, the return is not wonderful. I will assume $7000 per year of costs – council rates, water, insurance, and some maintenance. This leaves you with net annual income of $17,000 per year, and therefore a rental yield of 2.4 per cent.

A property investments return has two components though, income and capital growth. You state that the property was purchased 10 years ago for $400,000 and has grown in value to be worth $700,000 today. Your compound annual growth rate has therefore been 5.7 per cent.

There is the school of thought that once you buy a property the strategy should be to never sell. But you can’t eat bricks.Credit: Simon Letch

Your total return then is 8.1 per cent, assuming growth continues at the rate seen over the past decade. This is comparable to what you are likely to see in a balanced type fund within super.

From here it gets trickier because we need to do some crystal ball gazing. We’ve established that retaining your property or shifting the money to super will get you a fairly similar return outcome.

Perhaps this is wealth you hope to pass on to the next generation. If that is the case retaining the property might make the most sense.

However, we know with super that there will be no surprise expenses that crop up. What you earn is all yours. This can’t be said for the property. Do you foresee any major expenses coming up – a new roof, carpets, replacing the kitchen or bathroom? Properties wear out so the growth we are assuming may be overestimated, perhaps even entirely illusionary.

The second aspect to consider here is the transaction costs. For you to shift this wealth from property to super the property first needs to be sold. This means you incur agent fees, but possibly more significantly, capital gains tax.

As you are both retired, assuming you were able to engineer the sale early in a financial year so you had minimal rental income, your capital gains tax liability would be around $14,000 each.

You could likely reduce this through making concessional super contributions, albeit 15 per cent tax will be applied on those contributions when they hit your fund. There’s no free lunch!

The final aspect here is your broader goals. Do you want more income? If so, perhaps shifting this wealth to super is the way to go because the asset becomes liquid and so you can draw it down through your life. But perhaps instead, this is wealth you hope to pass on to the next generation. If that is the case retaining the property might make the most sense.

If you have a relationship with a financial planner it would certainly be worth sitting down with them and working through your options to arrive at a pathway forwards. Super contributions can be made up to age 75, so you have a few years up your sleeve.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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