My Property to Shares Transition Strategy (Simplified)

My journey to financial independence was a bit messy.

I started out in property, like a lot of Aussies.  We saved aggressively, bought a bunch of rentals (AKA leveraged to the sky lol), built some equity, and things were looking good.

Then eventually, we’d maxed out our borrowing, so we started buying shares with our savings instead.  And after watching the dividends roll in, something clicked.

I realised that if all our money was in shares instead of property, we could actually retire pretty soon.

But there was a problem.  I had no idea how to get from where we were, to where we wanted to be.

I looked everywhere, and I couldn’t find a single person who’d done what I wanted to do.  Take a property portfolio and convert it into a share portfolio for income, while somehow living off it at the same time.

So, I made up my own strategy.

That process started about 10 years ago now, and it’s worked pretty well.  So today I want to walk you through how to do it – the different methods, and how I thought about the risks and all the practical stuff.

This is for anyone in an equity-rich, cashflow-poor situation, wondering how to turn that money into cashflow they can live on.

Why switch to shares for living off?

Property can build impressive wealth over time.  But when it comes to living off your assets, you need cashflow hitting your bank account.

And that’s where residential property doesn’t quite stack up.

A diversified share portfolio can comfortably throw off around 4-5% a year in usable income – a mix of dividends, franking credits, and a bit of harvested capital gains.

Property sounds similar on paper – a 4% rental yield is fairly normal in capital cities.  But even before mortgage payments, that yield gets hammered by expenses – more than any investor wants to admit.  Council rates, water rates, insurances, management fees, strata fees, repairs, long term maintenance, land tax, vacancies… the list goes on and on.

That 4% often becomes closer to 2% in your pocket.  Residential investors who argue otherwise either aren’t being honest, have deluded themselves, or  have never actually audited their properties over a 10 year period.  When I did, I was a surprised, horrified, and even a little disgusted lol.

And that’s if it’s totally paid off.  So in simple terms, a $1 million share portfolio can produce around $40-50k a year, versus closer to $20-25k in property.  Same equity, but double the income.

Property, leverage and freedom

Now yes, you could potentially stay highly leveraged and keep making greater gains than you could in the share market.

But leveraged property and freedom do not mix well.  In most cases they are, in fact, incompatible.  Leverage means loan repayments and usually negative cashflow at the exact time you want money coming in.

Shares have another advantage here, which is access.  If you need $20k for something, you can sell a little chunk and have the cash quickly.  You can’t sell a spare bedroom, and you won’t be able to keep accessing equity outside the workforce.

Likewise if your share portfolio leans more towards high growth, like US or global shares.  You can simply sell small parcels of your gains for cash when you need it.  That’s how plenty of wealthy US investors live off portfolios that only yield 1-2%.

So with shares, your ‘spendable cash’ doesn’t come solely from income.

To be clear, plenty of Aussies retirees live perfectly well off rental income.  What I’m pointing out here is the opportunity.  They could actually have a much higher standard of living by reinvesting elsewhere.  Because most people are holding low-yielding capital-city property, which is one of the least efficient ways to fund a freedom-based life.

The methods to get you there

There’s not just one way to turn your property equity into something that pays your bills.  And you do NOT have to just use shares, even at all if you don’t want to.

Here’s a few ways to make it happen, in rough order of speed and effectiveness:

1- Work longer to pay down loans.  Slow, but it works.  You could also refinance to a longer term, switch to interest-only, renovate to increase rent or try AirBnB (but that’s a business in itself).

2- Sell some property to clear the loans on others.  This leaves you with fewer properties, but owned outright, meaning debt-free income.  Faster than option one.

3- Swap low-yield property for higher-yield property.  Sell and reinvest into locations or property types with better cashflow, ideally ending up with a few paid-off assets.

4- Sell property and move into other higher income assets.  This could be shares, ETFs, LICs, peer-to peer lending, or real estate trusts.  The route I took (more on this below).

And you don’t have to pick a single lane, either.  Plenty of people hold both property and shares for more diversification and peace of mind.  The only catch is that if your property yields less, you may need a bit more total wealth to fund the same lifestyle.

Now let’s focus on the property-to-shares route, because it’s the one I know best.  But further down, I’ll also share another non-shares option that’s incredibly simple where you don’t even have to reinvest into other assets.

My personal approach

As I started mapping this out in late 2016 – literally with a pen, paper and calculator – a few things seemed important.

— We need cash to live off.
— We need to build our share portfolio over time.
— We should aim to reduce CGT where possible.
— We want it to be simple and not too stressful.
— We should aim to have flexibility over when to sell.

With all that in mind, here’s what I came up with:

1- Sell the property with the most equity in it. This creates a big chunk of cash and gives the most to invest (and live off).

2- Park that cash in an offset account so it’s accessible and earning a return

3- Live off this cash each month, while also adding to our shares, and paying any shortfall on the remaining properties.

4- Make it so this cash lasts a couple of years.  Then sell the next property and repeat.

5- After roughly 10-12 years, we should end up with no property and a fully built share portfolio we can live off forever, all while not having to work in the meantime.

This ticked every one of those boxes, and thankfully, it has worked out exactly as I hoped it would.  Now granted, we ended up earning money which made it even easier.  But the entire plan was deliberately built around NOT factoring that in.  I never want to feel forced to work, so I’ve always discounted that side of things.

Why it worked so well

A few reasons why I reckon this path was effective…

The multi-year gap between sales gives you lots of flexibility.  You’re never forced to panic sell, so you can choose your timing and which property is best placed to sell.

The cash earns a return while you use it.  It’s also accessible so you aren’t stressing about bills or mortgages, ever.  Our loans were interest-only so the offset money improved our monthly cashflow.  If it was P&I loan then it means loans are paid down faster, creating more proceeds from the next sale.

You’ve slowly dollar cost averaging into shares instead of a big lump sum and then nothing for 2 years.  You could argue this is statistically inefficient, but given the offset savings and psychology at play, I think it’s a winner.

Any dividends or part-time work can be used to either speed up the portfolio growth or stretch out the time until next sale.

Spreading the sales out massively minimises tax versus doing it all in 1-2 years.  And imagine selling 3-4 properties at once – how incredibly stressful.  Plus waiting to sell most of them until AFTER you’ve left work puts those gains in a much lower tax bracket,

When you zoom out, it’s effectively dollar cost averaging out of property and into shares while being retired.  Sounds extremely odd when you put that in a sentence 🙃😂

Note: When you’re choosing income-producing investments, don’t chase the highest yield you can find.  It’s often a trap.  Anything above 6% net yield deserves serious scrutiny, especially if you are also expecting growth.  I wrote about chasing yield many years ago here.   For most people, a boring, diversified portfolio that balances income and growth is the strongest bet (since you can always harvest gains anyway).

“But doesn’t selling down assets hurt my wealth?”

A common concern is that selling off assets and not reinvesting all the money means you’re going to end up with less wealth over time.

But that’s not true.

For starters, you’re only selling one asset at a time. The rest of your portfolio stays fully intact and keeps growing in the background (on average).

On top of that, you’re not spending all the money – only some of it.  Likely just a small percentage (more on this in a moment).  So you’re also reinvesting most of it.

I felt funny about living of capital gains rather than income too.  It feels unsustainable somehow.  But eventually I realised that gains are just another source of return you can tap into.

The real thing that matters is to keep it in proportion to your returns and wealth.  As long as your total wealth is intact and ideally growing over time – and spending stays sensible relative to that wealth – a strategy like this is completely sustainable.

It would be silly to argue an early Amazon investor shouldn’t sell 2% of their stock each year to live off because that’s somehow ‘unsustainable’ or ‘risky’ because it’s not income.

Regardless, if shares aren’t your thing, you don’t want to work longer to pay off your rentals, and you don’t want to invest in other assets because you love your existing residential property portfolio… there’s STILL a way to make it work despite your stubbornness 😉

By the way, if you like these kinds of deep dives on wealth and freedom, I send one out each fortnight in my newsletter. Join here if you haven’t already:

The do-nothing investor

For a relatively rigid person, here’s how I would make it work…

Before leaving work, refinance all properties to the maximum amount (you can apply this with the other strategies too by the way if you like).

It’s possible you can actually live off that money for several years before starting the below strategy.

Sell one property and put all the money in offset.  Live off that money for many years years, while your remaining properties hopefully keep growing in value.

When funds are running low, or if it seems like an ideal time to sell, offload the next one.  Then repeat.

Why does this work, even without investing?  Well, quality assets tend to grow in value faster than inflation over time.  And because the remaining properties are leveraged, wealth growth should still be decent.  Plus, because you’re not investing, the cash pile lasts a lot longer.

So, each time you come to sell, you end up with a much bigger chunk of money than the previous time.  And that means much, much longer until you need to sell the next one – potentially 5-10 years in many cases.

Over time, the properties and rents continue growing.  And again, as long as you’re only living off a reasonable amount of your total property equity – say 4-5% – this should work perfectly fine.

Regardless of which method you choose, one big question is the following…

Which property do you sell first?

I just started with the one with the most equity.  Because that’s what creates the most passive income, the fastest, or the most cash to live off.

So if you have a few, I’d be looking to these ones first.  Selling a property with barely any equity isn’t much use.  It might cut your costs if the property is negative cashflow, but it doesn’t give you much to work with.

It’s common for people look at properties and think “this one has performed the best, so I should keep it.”  But quite often markets that have performed the best/worst over the last 5-7 years, does the opposite over the following period.

For example, Sydney and Melbourne were the strongest markets from about 2012-2019 while Perth, Brisbane and Adelaide didn’t do much (Perth went backwards).  But in the last 7 years, the opposite has occurred.

Next, consider selling conditions.  If your properties are in different areas, which market is strongest?  You’d rather sell into strength than weakness.

And if two have similar equity and selling conditions, maybe keep the one which you think has a better outlook for the next few years – you might just squeeze a bit more growth out of it.

If it looks as though it won’t be a good time to sell, you can do a bit of part-time work, or pause your investing for a while to give time for things to improve.

As you can tell, there’s no exact science here.  It’s a lot of probabilities and guesstimates.  But as mentioned above, if you can remain flexible over your timing of sales, it can help dramatically.

How much property equity do you need to retire?

To transition cleanly from property to shares, you’re obviously going to need more for FI than a pure share portfolio would.

With shares, the usual rule is 25x your annual spending.  But to transition, you need to account for selling fees, transaction costs, capital gains tax and then some wiggle room in prices in case your properties aren’t worth quite what you think.

Remember, even small price drops can cut your equity quite a bit given the leverage involved, especially across a portfolio.

These costs can shave a decent amount off your net worth figure.  That’s painful, but to me it’s the price of freedom.  If you don’t like it, stay at work or find an alternative.

As a rough guide, I’d say you need around 30x your spending in investment property equity to do this (or 35x if you want to be conservative).  But CGT will differ dramatically by situation.  Some people may only have modest equity in lots of properties (as in our case), while others will have massive equity in just 2-3 they’ve owned for decades.

If you’re trying to just live off property, these rules won’t apply.  Instead, you just want to look at your net property income after all costs, whether using your current properties or other properties you might reinvest into.  That’s basically your safe spending rate.

We’re dealing with big numbers here, so definitely sit down with an accountant to flesh this out and see the tax consequences (but don’t let that scare you out of doing it).  If you want a financial planner to help you work through this transition in practice, there’s a link at the bottom of this article.

Final thoughts

Regardless of which path you take, hopefully this helps you envisage how to turn your property equity into income.

Once you’ve built wealth, you realise that sometimes net worth doesn’t quite cut it.  You need a tangible way to create usable income from your assets.

And remember, don’t worry that you may own a smaller asset based, measured in dollar values.  Your wealth will keep growing if you do it right.

In any case, you can always earn some cash and keep investing to expand your assets further if you so desire.  Only now you get to do it from a position of freedom.

You spend years and years funding and feeding your portfolio.  At some point, your portfolio needs to start funding and feeding YOU.

By the way, if you want a more detailed version of how to pull this off, including the bits I’ve had to skim over for simplicity, I cover the whole transition to freedom (including the lifestyle and psychology) in my new book.

Resources you might find helpful:

 Financial Planning
For help implementing this strategy and making your retirement happen, you can connect you with someone I trust. Find out more.

 Mortgage Broker
If you want to optimise your mortgages or access equity before leaving work, get in touch with my personal broker. Check them out.

 Strong Money Australia Book
The complete guide financial independence in Australia. Amazon. Audible. Spotify.

If you use the above services, this blog may receive a benefit at no extra cost to you. I only recommend things I genuinely believe in.