Overview of property investment exit strategies and selling investment properties.
The best exit strategy is to not exit, but if you have to sell your investments here’s how the experts do it
Want to know more?
- 4 secrets to successful selling
- Expert exit strategies
- What is capital growth?
- How to avoid selling in a panic
"People never think about what happens at the end," says award winning investor and mentor Lindy Lear. "Most people only think about the beginning and getting started in property investment."
"The size of your asset base determines the level of passive income you’ll get in retirement," she continues. "Every Time you sell an asset, you’re reducing your asset base."
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."
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.
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.
Property expert Paul Do
An important consideration if you need to sell a property is maximising the diversification of your portfolio. If your investments are predominantly in one state, sell where the concentration of properties are. For instance, if you have three properties in New South Wales and one in Queensland, sell one of the properties in New South Wales. By having a better spread, you’re going to reduce the land tax charged. Land tax varies depending on the state you’re in, but it’s around one to two percent of the value of the land over the threshold in that particular state. If you have a number of properties in a state and you sell one, the value of the land above the threshold reduces and so you incur less land tax. In contrast, if you have only one property in a state, then selling that property might save very little land tax because the value of the land above the threshold might be minimal in the first place.
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.
Paul is the author of "I Buy Houses: The Property Investors' Handbook"
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."
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Expert exit strategies
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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)
The importance of having an exit strategy when it comes time sell
Jeff Sommers is 70. He believes an exit strategy wasn’t that important when it came to sell his properties.
"I did not have an exit strategy when I sold some of my properties. They were all negatively geared and I had a cash flow problem because I couldn't find work. I sold at a price below what the properties were valued at a few years ago," he says.
After selling, he discovered a strategy that he wished he knew about beforehand. The strategy involves finding someone wishing to buy, but unable to get a loan. "They take out an option to purchase at a later date when banks relax a bit. The price is also higher than at present. They move in at a rent high enough to cover interest and insurance but also they pay the rates separately. When the banks relax they can then purchase," he says.
Avoid selling your investment property in 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.
If you would like to learn more about investment strategies, check our investment strategies guide. This guide outlines the common strategies investors use to get into the market and how to make investing in property work for you.