On many occasions we've met with investors who are unsure what to do next with their investment property. Some have had a negative experience with a past tenant or property manager and feel they want to put an end to the troubles. Others aren't seeing the return they may have expected. Whatever the reason, it is a common question: should you sell your investment property or hold onto it?
In this post we'll take a look at the common reasons people consider selling their investment property rather than holding, and a series of questions to ask yourself to help determine the best course of action.
Please note this article is written for those investors in the early and mid stages of building an investment property portfolio for the long term (rather than those entering the retirement phase and selling property to pay down debt).
This information is intended as a guide and not financial advice. Please discuss your individual investment goals and circumstances with your accountant and/or financial advisor before taking any action.
4 Common Reasons People Consider Selling Their Investment Property
1. Money is needed for other things
Perhaps money is desired for home improvements, paying down debts, or even a holiday or new car. The important consideration here, especially with depreciating assets such as a car, is that property is generally going to be increasing in value over time. Is it really wise to sell a property which is increasing in value to pay off a depreciating asset such as a car which decreases in value over time?
2. Value of the property has remained stagnant over time or is dropping
If the value of a property appears to be dropping, it is understandable to consider selling. However, how long is this downward trend likely to continue? Has the downturn happened for just a short period? Alternatively, if value of the property has remained stagnant for some time, it is natural to consider there may be a better property investment opportunity elsewhere.
An important consideration here is what the cost of selling the property will be, considering agent's fees, stamp duty and capital gains tax. Do the number stack up in favour of selling?
3. There's another opportunity too good to pass up
This could be a relocation overseas, long term international travel, or even a significant shift in investment strategy such as investing in booming stock, cryptocurrency or some other investment opportunity du jour. The viability of considering selling for these reasons comes down to the individual investor's perceived return on investment and appetite for risk.
4. There has been a negative experience with a past tenant or property manager
It is amazing how much a negative experience can impact an otherwise strong long-term investment plan. A professionally managed property, combined with suitable landlord insurance, will help ensure any short term pain doesn't trump a great long-term investment plan.
4 Points to Consider To Help Determine Whether To Sell Your Investment Property
1. Is Your Investment Property Positively Geared?
Property which is positively geared, bringing in greater income than expenses, means you will have the combined benefits of ongoing income and a capital gain if the property increases in value over time. In short, the longer you hold the property, the more money you are going to make.
Remember that once you sell, you are "turning the tap off" on that ongoing income. That is, if the property is generating $100 cash for you each month, if you were to sell you would no longer have this income stream. Would you be able to generate that $100 extra per month somewhere else? Do you really need to sell if the property is paying for itself, increasing in value over time, and generating an ongoing income stream for you?
2. Can You Afford To Keep The Property?
If your property is not positively geared, the decision becomes a little more complex. When the property is costing you money to hold, the consideration becomes how much you can afford to "lose" while holding onto this asset. While the capital gain will be there in the long term, if holding the property is costing you more money than you can afford, the decision to sell becomes very compelling.
3. Can You Access Equity Instead Of Selling?
If money is needed for other areas of your life, is selling the property actually required or is it possible to access the equity you need through a bank loan instead? Remember, equity is the difference between the market value of your property and the amount you still owe on your home loan, and is commonly used by investors to obtain money for renovations or to help purchase additional investment property.
We wrote an article some time back on how to calculate the equity in your home.
As mentioned earlier, when you sell you do not receive the full difference between what you owe on the home and the sales price. There will be capital gains tax, real estate agent fees and commissions, solicitors fees and stamp duty to consider. These costs of selling eat into the equity you've gained while owning the property, which is not the case if you borrow against the property rather than sell it.
And the best part - if you can access the money you need from equity rather than selling, you get to keep the property and realise the benefits of its continued future growth.
4. Are You Considering Selling Just Because Of A Bad Property Management Experience?
One word: don't. An expert, professional property manager will ensure the potential for negative investment property experiences is limited and will guide you with comfort through any difficult times such as insurance claims or tribunal processes if the worst happens.
If you are seeking expert, personal and professional property management in Newcastle and Lake Macquarie, contact us today. We'd love to bring you comfort in the ongoing and long term management of your investment.
Carnelian Property Management Newcastle NSW
We are a family-owned and run Newcastle real estate agent offering expert property management across Newcastle and Lake Macquarie.