How to sell an investment property
Overview of property investment exit strategies and selling investment properties.
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The best advice for property investors is usually not to sell at all. Holding onto your investment usually means you build wealth over time as the property grows in value.
But keep in mind that properties don't always grow in value, and you might have other reasons that make it necessary to sell an investment. The advice on that works best for you depends entirely on your goals, financial position and appetite for risk. Also, please note that the information on this page is general advice only.
We spoke to three property experts to get their advice on selling your investment property.
Author, I Buy Houses
Property investment advisor, Rocket Property Group
Founder and CEO, Multifocus Properties and Finance
Don't sell if you can avoid it
Industry experts advise that the best exit strategy is to not exit at all. The longer you can hold your investment property(ies), or principal place of residence, the greater capital gains as the years progress.
Paul Do, author of investor's handbook I Buy Houses, says, "My first principle is never sell if you can manage not to."
"If you need the funds you can replicate selling by borrowing more against the equity in property. But be sure to never extend yourself, only borrow as much as your cash flow can cover the interest comfortably."
And when you sell, there are a range of expenses that will eat into your profits. When you sell you will incur capital gains tax and it's going to cost about 10% of the value of the property in transaction costs to sell and buy another property," says Paul Do.
But there are times when selling an investment property is necessary.
"If you’re looking at cashing in on your property investment portfolio and you want to start reaping the profits, you should do this in an orderly manner." says Origin Finance’s Philippe Brach.
There are a number of ways people can capitalise on their investments when it comes time to sell. You don’t need to know exactly how you’re going to do it when you first buy an investment property, but it helps.
"The important thing is to know what your options are," he says. "There are no hard and fast rules as everybody’s circumstances are unique. Different investment strategies are appropriate for different people."
If you have to sell, get the timing right
Paul Do says, "If you're looking to sell, do it when your marginal tax rate is low, people who are in retirement or on maternity leave will incur less capital gains tax. For people with big portfolios, only sell one property a year.
The timing of when you sell is also important. One of my principles is to buy when the property market is in the Buying Zone. There are two criteria here: the first is that relative rental yields must be high. This is rents are high vs interest rates. Also vacancy rates must be low. Conversely you want to sell in the Selling Zone, which is the opposite of the aforementioned indicators.
Avoid selling in a panic
If you are looking to sell your investment property then you should be looking to sell smart. To avoid selling your property in a panic then you should make sure that you:
- Think of the future when buying your property: What is the expected growth and yield vs the expected costs. Run the numbers and make sure the investment is going to generate a sufficient return to justify the expense.
- Create a buffer: Have a buffer to protect against hidden expenses. If the market turns bad and yields drop, you should some money tucked away to cover the loss for a period of time. A buffer gives you time to properly arrange the sale of a property subsequently avoid selling for less than you bought it for.
- Get insurance: Landlord insurance will help you save money if you are not earning money on the property.
Strategy 1: Sell the whole property
"This is a safe strategy and is common among the risk averse, especially retirees," says Philippe Brach, founder and CEO of Multifocus Properties and Finance.
"You will have to accept the fact that you're going to have to pay capital gains tax (CGT) when you sell your investments. The maximum amount you will be taxed is 22.5% currently.
How much CGT you'll have to pay depends on your income and the 22.5% figure is the top tier for high income earners. If you have a million dollars in taxable equity in your portfolio, you're still walking away with $775,000 after paying CGT. Borrowers can then put this in the bank and live off the interest."
Lindy Lear, property investment advisor for Rocket Property Group, says that investors selling a whole property "can then use the money to reinvest with financial guidance into a fund and live off the returns."
Say you've built a $5 million property portfolio. $2 million of that is debt and $3 million is equity. If you sell everything, of the $3 million of equity, there are substantial capital gains tax and selling fees deducted from that figure, which will reduce the money available to invest. If the money is invested into another asset class or put into a high interest savings account or term deposit at 4% for instance, there could be a return that is enough to provide for most retirements. The downside is that you are selling off all your growth assets.
Strategy 2: Sell half the property
You could sell half your property and use the proceeds to pay off some or all of your debt while still holding onto part of your investment.
Lear says, "Theoretically, the half you sell can go towards paying off your debt on the half you keep. This way you still have property assets."
"This strategy is more efficient than the first and it involves liquidating part of your portfolio to pay off your debt and living off the rental income stream from the remaining assets in the portfolio," Philippe says.
"It has two main advantages. First, you're going to pay less CGT. Second, you still have exposure to capital growth. Capital growth is not linear. For example, if you were to look over a period of ten years, even though prices may have doubled, the rate of growth is not even from year to year. You may experience five years of flat growth followed by a couple of years of exponential growth followed by another flat period. Overall the long term average is consistent."
Strategy 3: Live off the equity instead
Another option instead of selling is to keep the property and live off the equity. This won't work for every borrower, however.
Lear says, "Say you have a $5 million portfolio with $3 million in equity and $2 million of debt, the debt is serviced by the tenants in your properties and you live off the equity in your properties for personal use. At 5% return on nest assets that is $150,000pa income. Because you've kept the asset base, if it goes through another property cycle, the value of the portfolio will appreciate with the market and you could in another seven to ten years have an asset base of $10M with $2m debt and $8M of equity to live off. At 5% return on net assets that's $400,000 pa . A nice nest egg to retire on!
"People need to know what their goals is. Say someone wants to retire in ten years with a passive income from property, they will need to work backwards from their goal to figure out how to
What is capital growth?
Capital growth is the increase in the value of a property. Historically property has grown in value from year to year and is driven by factors such as population growth; and demand for property type and location.
"We have been in an environment for the past two to three years where capital growth in the property market has been subdued," says Philippe.
"If you’re looking at the historical average, equities and property have been growing at an average rate of 10.5% since 1926*. Capital growth is not linear. For example, if you were to look over a period of ten years, even though prices may have doubled, the rate of growth is not even from year to year. You may experience five years of flat growth followed by a couple of years of exponential growth followed by another flat period. Overall the long term average is consistent." he continues.
*(source AMP Capital – Shane Oliver)
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