There are many reasons investors consider selling their properties, but before you try to cash in on the boom – make sure you know what you're signing up for.
Blogger: Cam McLellan, director, OpenCorp
Selling an investment property is like a game of snakes and ladders. You climb and climb towards financial freedom, but when you sell it’s like landing on a snake. You slide down and have to start all over again.
The best advice is always to hold, hold, hold and hold.
Because the truth is you don’t need to sell property to access the profits you’ve made. When you sell up you destroy your profit margin, because you have to pay capital gains tax (CGT) and sales agent’s fees. If you keep flipping properties, you limit your success to a rising market. That’s like taking a punt – and smart investing is about eliminating risks, not taking them on.
If you decide to sell an investment property, consider the advantages and disadvantages before putting up that For Sale sign.
DISADVANTAGES OF SELLING
• Legal fees
• Agent’s sales commissions
• Marketing costs
• Capital Gains Tax (CGT)
• Opportunity cost
CAPITAL GAINS TAX (CGT)
CGT is one of the biggest costs associated with selling and investment property. You will be handing between 25 and 50 per cent of the increased value of your property over to the government. CGT is charged at 50 per cent unless the property has been held for longer than one year, in which case you will pay 25 per cent of the increased value. I don’t think the government deserves this money. It should stay in your pocket. After all, you’re the one who took the initiative to invest!
When you sell a property you lose the opportunity to profit from future market price increases. You need to take this into account when you’re considering whether or not you should sell. Ask yourself how much money you will lose if the property doubles in value over the next 10 years.
It’s always better to buy well and hold for the long term. If you need to access the capital gains, you should be able to restructure your finance so you can access the usable equity. This means you avoid incurring CGT and other costs. Most people who sell one investment property end up buying another one, anyway.
Then they have to pay purchase costs once again, losing money twice over.
ADVANTAGES OF SELLING
• Accessing capital gains
• Reducing debt
• Cut out deadwood
ACCESSING CAPITAL GAINS
An equity gain is only a gain on paper until it’s accessed through selling or refinancing. I prefer to refinance rather than selling.
The only time I would seriously consider selling an investment is when I want to reduce debt to improve cash flow. This may form part of an exit strategy. I don’t advise this if you are still trying to build your portfolio.
CUT OUT DEADWOOD
You may need to consider selling if you’re holding an underperforming property. Some people make the mistake of holding on to poor investment properties, or keeping their home as an investment when they buy a new one. The problem with this is that most homes don’t meet the basic criteria of a good investment that will perform at the required level, especially if CGT exemptions can be used. Talk to your accountant about CGT exemptions, because they can be used years after you move out of your primary residence.
You may buy and sell several family home in your lifetime or you might decide to sell an investment property as part of your exit strategy.
• Smart investors hold for growth.
About the Blogger
Director of OpenCorp, Cam McLellan is committed to sharing his passion and property investment knowledge with everyday Australians.
After thriving in the telecommunications, technology and recruitment sectors and making six BRW Lists in 8 years, alongside accomplished OpenCorp. entrepreneurs Matthew Lewison and Allister Lewison, founded OpenCorp. eight years ago.
Cam started investing in real estate at a young age and quickly mastered the art of building sustainable wealth. He has used the same wealth building strategy to develop a multi-million dollar business, sharing his knowledge and skill with ordinary Australians. Cam has personally bought, sold and developed numerous properties and has an extensive residential and commercial investment portfolio.
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