Life has a funny way of throwing us curveballs, like the birth of a child, a sorrowful death in the family, a spine-chilling accident, losing a job, or even having to relocate. These moments often prompt us to reevaluate our assets, asking ourselves, “Should I sell my investment property?” amid such significant life changes. This question isn’t just about numbers on a paper; it’s about understanding how major life events can influence our decisions related to real estate investments and how factors such as interest rates can play a crucial role in timing the market.
As we delve deeper into this discussion, we’ll consider not just the emotional aspects but also the hard facts. From evaluating your investment property’s performance in current market conditions to understanding the opportunity costs of holding versus selling and assessing long-term goals, we’re taking a comprehensive look. Interest rates, often the heartbeat of the real estate market, will be a recurring character in our tale, helping us decide when selling not only makes emotional but also financial sense.
And it’s OK. I’ve sold some of my investment properties at various stages of my life too.
Main Reasons People Sell Their Investor Property
Can’t afford the loan repayments
Let’s be realistic about this one, especially considering the recent significant increases in loan repayments. If you’re finding yourself struggling to meet your monthly payments, selling might be your best option. While interest rates may decrease in the future, they’re unlikely to return to their previous historic lows. Additionally, rental growth rates are expected to stabilize rather than continue their steep upward trend. Consider redirecting the proceeds from the sale toward your home loan – I’ve actually done this myself. I moved out of my principal place of residence (PPR) which was fully paid off, rented it out for $800 per week for a while, but found myself paying substantial income tax. Eventually, Kath and I decided to sell it, using the proceeds to reduce the loan on our new PPR.
Managing ongoing maintenance costs
Properties typically start requiring significant maintenance around the 15-20 year mark. Even before that milestone, regular upkeep is necessary – exterior painting is recommended every 10 years, though some can stretch this to 15. You’ll need to deal with various issues: roof leaks, foundation movement, air conditioning repairs, fan replacements, lighting updates, hot water system maintenance, and the list continues.
Divorce situations
During divorces, while one partner often wants to buy out the other’s share, financial constraints frequently make this impractical.
Financial priorities
Sometimes, the smartest financial move is to sell your investment property to reduce your PPR mortgage. Your goal should be to minimize your PPR mortgage to a point where the weekly payments become manageable and don’t strain your finances. If selling an investment property can help achieve this, it’s worth serious consideration.
Alternative investment opportunities
While I may have some bias here, there might be better investment returns available elsewhere. However, it’s important to note that other investment vehicles typically don’t offer the same leverage advantages for capital gains that property does.
Understanding Your Investment Property’s Performance
Before deciding whether to sell, it’s crucial to evaluate your investment property’s performance thoroughly. Here’s what you need to analyse:
1. Rental Income and Capital Growth:
- Rent to cover mortgage: Most investment properties aren’t cash flow positive initially. Take my daughter’s property in Sippy Downs as an example – she receives $600 weekly in rent but faces a $820 weekly loan payment. This $220 weekly shortfall, plus additional expenses like insurance, council rates, maintenance, and body corporate fees, needs to be funded from her income. However, this negative gearing situation offers tax benefits that help offset some of these costs.
- Capital Growth Benefits: Despite the ongoing expenses, my daughter’s investment is building wealth through appreciation. The property is projected to soon gain approximately $200,000 in value from its purchase price, demonstrating how capital growth can justify the initial cash flow challenges.
2. Cash Flow and Expenses:
- Current Market Conditions: The investment property landscape in Australia is experiencing significant pressure on cash flow. Many investors who purchased during periods of lower interest rates are now facing tighter margins. While rents have increased, they’ve largely reached their ceiling. In my daughter’s case, while a marginal increase of $10 might be possible, maintaining the current $600 weekly rent helps retain reliable tenants. Recent maintenance costs, including a $500 dishwasher and $700 oven replacement, highlight ongoing expenses. Future potential costs include air conditioning and hot water system replacements. Though the carpet needs updating, cosmetic improvements like new flooring and paint wouldn’t justify significant rent increases, so we’re maintaining status quo.
- Yield Considerations: When evaluating whether to sell, compare your property’s net rental yield against potential returns from alternative investments, such as superannuation funds. However, remember to factor in both future capital growth potential and negative gearing tax advantages before making your decision.
3. Long-term Considerations:
- Age and Decumulation: If you’re over the age of 60, it might be best to decumulate and spend down your fortune rather than continue to accumulate wealth through rental income. This is a crucial consideration for long-term financial planning.
- Diversification: Having a diversified passive income stream is essential. If the property’s outflows (expenses) are greater than its inflows (rent), coupled with the need for diversification, it might be time to sell.
By evaluating these factors, property owners can make a more informed decision on whether holding or selling their investment property aligns with their financial goals and market conditions.
The Impact of Market Conditions on Your Decision
Market conditions significantly influence the decision to sell an investment property. Here’s how various factors come into play:
Way back in the global financial crisis. The only properties that were selling where total bargains. It was the time to buy, not sell. It is fair to say most investors didn’t sell because what they would sell for was terrible. Since then, the market has had ups and downs but never as bad as that.
Most of the time, even in small market slow downs the market is still strong enough to sell an investment property. Unless of course, theirs another global financial crisis.
Opportunity Costs of Holding vs. Selling
When pondering the question, “Should I sell my investment property?” it’s crucial to weigh the opportunity costs of holding versus selling. Here’s a breakdown to guide this decision-making process:
Opportunity Costs of Holding the Property:
- Capital Gains Tax Selling the property will lead to capital gains tax, which can eat into profits. You need to speak to your accountant. I’ve had lots of clients want to sell until they did the maths and worked out it wasn’t worth it.
- Potential for Long-term Growth: Real estate is known for appreciating over the long term, making it a solid choice for building wealth. By holding onto your investment property, you avoid significant transaction costs and capitalise on potential long-term capital gains. Some years back my wife wanted to sell one of our investments. She would only sell if we could get $420k. We could only get $400k. So we kept it. It’s now worth about $800k, so glad we didn’t sell.
- Avoiding Reinvestment Challenges: Holding on means you sidestep the difficulties associated with reinvestment, such as finding equally lucrative opportunities or managing the complexities of reinvesting in a different market or asset class. Unless of course, you just plan to plonk the profits onto your home loan. Nice one.
Opportunity Costs of Selling the Property:
- Immediate Cash for New Opportunities: Selling a rental property can provide the liquidity needed for seizing the next investment opportunity, whether it’s within the real estate market or another investment avenue.
- Mitigating Risks of Depreciation and Market Downturns: Recognising that sometimes the market can stagnate for years & not go up or even go backwards. Selling can be a strategic move to avoid losses, especially in volatile markets or when the property’s location no longer promises growth. It’s just hard to know when a market has turned downward and how long it might do so.
- Flexibility in Investment Strategy: Selling offers the flexibility to adjust your investment strategy, whether it’s to diversify your portfolio, address life changes, or simply take advantage of a more favourable investment climate.
Tools for Decision Making:
- Real Estate Appraisal: Before making a decision, a real estate appraisal can offer a clear estimate of your property’s current market value, aiding in a more informed choice between holding and selling. If your investment is on the Sunshine Coast I can do this for you free and remotely so as not to bother your tenant or property manager.
- Accountant: Speak to your accountant to understand the true tax implications.
- Financial Planner : I met with a bunch that wanted me to sell all my properties and put the money into super, because that’s how they get paid. I then found a great guy who looks at people’s total situation, who advised not to sell any of them. Although he did suggest Kath & I yearly max out our super contributions.
In summary, the decision to hold or sell an investment property is multifaceted, involving considerations of taxes, market conditions, personal goals, and the potential for future gains. So don’t rush into it
Assessing Long-Term Goals and Investment Strategy
When assessing long-term goals and investment strategy, it’s essential to detach emotionally from the property and view it through the lens of strategic financial planning. Here are practical steps to align your investment decisions with your life goals, ensuring a coherent strategy that resonates with your financial aspirations:
- Define Your Goals:Short-term Objectives: Such as saving for a holiday, buying a boat or caravan, or a deposit for a larger home. These goals typically have a time horizon of less than five years.Long-term Objectives: Including retirement, funding a child’s privately school fees, or building wealth over time. These objectives usually span more than five years, allowing for investments with a higher risk tolerance and a focus on growth-oriented assets. I have a spreadsheet that shows the value of my investment properties now and then how much should they be worth each year over then next 10 years assuming they increase in value by 4% a year. Whats exciting is usually they increase in value more than 4% a year. But its best to be cautious to account for years they might not increase at all. Of course my spreadsheet al;so shows my superannuation balance and value of y principal place of residence. Recently my wife had a feeling she wanted to sell one of our older iets,emt properties, and the profits into suoper, until I owned her its potential value in tyhe next 10 years. Actionable Steps: Begin by being specific about what each goal entails, the required financial commitment, and the timeline for achieving it. This clarity is crucial for tailoring your investment strategy effectively.
- Strategic Investment Decisions:Risk Assessment and Management: Before any investment, understanding the associated risks is paramount. This involves diversifying your investment portfolio to mitigate risks and maximize returns effectively.
- Property Selection and Financial Planning: Once your goals are set, select properties that align with these objectives, considering factors like potential for appreciation, cash flow, and management ease. Financial planning becomes a key component here, guiding your decisions to ensure they fit your long-term strategy. You can ask me who I use if you like.
- Professional Consultation: Seeking advice from real estate professionals like me, your accountant & financial advisor can provide insights that refine your strategy, helping to navigate through complex decisions with a clearer perspective. Most real estate agents will tell you yes sell it. An agents role should really be to tell you the possible sale price. Then consult your accountant and financial planner to help make your decision.
- Regular Review and Adaptation:Monitoring Progress: Regularly review your investment strategy and portfolio performance in the context of your goals. I do this about every 6 months becsue its easu fpor me to sa a free sales apprqaisal on my own propeties, plus iots find to open my psreadhseet and see if I am on or off track. You should be doing this at lest every 12 months. This includes assessing whether the property continues to align with your long-term investment strategy and adjusting as necessary based on market conditions and personal circumstances. I have had clients get me do a remote sales appraisal annually for 5 years until the investment property was at a value that would work for them.
- Adaptation to Changes: Be prepared for life-altering events or shifts in financial circumstances. A flexible approach, capable of adapting to changes, is essential for sustaining long-term success in real estate investment.
By following these guidelines, investors can ensure that their decisions are not only driven by immediate returns but are also aligned with their broader financial and personal goals, creating a more satisfying and strategic investment journey.
When to sell your investment property?
You can sell your investment property right now. In its current condition, with the current tenant in place. It just might give you the best results.
Selling immediately.
You may need to sell immediately regardless of the current tenant, property presentation and lease end date. You might have found your dream home you want to buy and can only do so if you sell your investment property. How exciting. Just keep in mind you might sell for less than you had hoped because of how some tenants present a property, the rent they pay and the lease end date will affect the finale sale price. So let’s do that, just be prepared to sell for less.
Sell leading up to the lease end date.
Giving your tenant notice and putting the property on the market about 2 months before the lease ends is a great strategy. It will ensure you continue to earn a rental income and will allow buyers to secure the property now with a settlement shortly after the lease ends. Negatives with this strategy is that the tenants might not present the property as best they could.
Selling after the lease ends and the tenant has vacated
This will give you the best results. It allows your sales agent to have access 7 days a week 24 hours a day. Allows you to possibly give the property a freshen up too. Negatives are you need to cover the mortage repayments while its for sale.
Conclusion
To simplify all this. Should I Sell My Investment Property?
Start with a remote sales appraisal to know the possible sale price.
Speak to your accountant to understand tax implications.,
If you choose to sell decide if you need to sell immediately, closer to the lease end date or after the tenant has vacated.
Ideally property investment is for the long run but like me for many reasons often property investors have to sell.
FAQs
When is it advisable to sell an investment property?
Best is once the tenant vacates. But sometimes people need to sell immediately with the tenant in place and thats OK too.
Is 2025 a good year to sell my investment property?
Assessing the duration of your investment and your initial goals is crucial. It really coes down to how long you’ve owned it for and what your net profit wil be after tax and fees. Given the substantial increase in property values post-pandemic and the anticipation of more moderate growth in 2025, selling your investment property in 2025 could be a strategic move to capitalise on the accrued capital gains.
How can I minimize capital gains tax on my investment property in Australia?
To potentially reduce your capital gains tax (CGT) liability when selling an investment property in Australia, consider the following strategies: hold the property for at least 12 months to be eligible for a 50% CGT discount, maintain the property as your primary place of residence (PPOR) even if you are not currently living in it, and utilize the 6-year rule, which may exempt you from CGT if the property is sold within six years.
Who should I consult about investing in property?
When considering property investment, it’s beneficial to engage with several professionals, including a mortgage broker or financier for financial arrangements, a real estate agent for market insights, a property manager for maintenance and tenant issues, plus your accountant.
