Ask Paul: Should my mum invest $1 million in ETFs?

Dear Paul,

My mother, who is 64, does not work and has no income. She recently bought a small retirement unit in western Sydney with cash. She will move into the unit and she intends to rent out our family home and live off the rental income.

Let's say the home is worth $1 million and she can get a net rental income of about $50,000 a year to live on.

Would she be better off selling the home and putting the $1 million into a high-dividend exchange traded fund (ETF) that pays around 5% or dropping the $1 million into superannuation and living off the super income (she currently has a very low super balance)? - Eric

This is a complex question, Eric. It involves a serious mix of tax and investment strategies and your mum's views on retaining the home or selling it and reinvesting the money. A lot of the answer will lie in your mum's 'sleep at night' test.

Frankly, a well-located property or a diversified portfolio of quality shares is not likely to generate vastly different returns. So, I need you and your mum to work out the issues that come down to personal preference. I can help you a little by making some general observations.

Clearly, holding the property as a rental will be far more labour intensive than holding a diversified ETF. There will be all the usual issues with tenants and maintenance, ensuring records are accurate for tax purposes and insuring the property.

From a tax viewpoint, you and your mum will need to talk to your accountant.

Questions you need answered are things such as:

• Will your mum have to pay land tax?
• Can she qualify for the 'six-year absence' rule and maintain the home as her family residence?
• What are the capital gains tax consequences if the home is rented and treated as an investment property? 

The answer to which is the best - property or shares - is not an easy to answer.

A lot depends on the location of the family home - for example, is it in an area near a station that may be rezoned. This could multiply its value.

It is easy to argue that, broadly speaking, in your mum's shoes, I'd prefer shares to the family home. As you know, long-term returns have been excellent. You can spread your risk in a diversified ETF very cheaply.

An ETF does not give you problems with maintenance or blocked toilets. I like the passive approach, preferring to spend my time on family, friends, travel and sport, not managing a property.

But others will argue that property is a much better asset for them. I absolutely respect that view. Many people like to drive past their tangible asset rather than just look at electronic records saying they own an ETF.

I don't see this as a return-based argument. Both options should be fine over the long term. I'd seek the tax advice you need and take that into consideration, but the heart of this issue is personal preference.

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