Why would you sell an investment property? - searchpartyproperty

Why would you sell an investment property?

Selling Property Investment

Selling your investment property

I just sold a Property in Melbourne, at made $110k profit in 4 years – Sale price $293K
1. Property is at the Peak of the market – You’re thinking there is going to be a price decline
2. Look to move the money into other property or business
3. Watch out for the Capital Gains Tax – especially if you are doing multiple sales in 1 year

This is Luke Moroney for the daily property search podcast. And what I’d like to talk to you about today is, why would you sell an investment property? Before we get into this topic, just a disclaimer that this podcast is for general purposes only and should not be regarded as legal financial advice, make sure you get your own independent advice when it comes to investing. So the whole intention about an investment property is to hold it for the long term. And I think I’ve said this previously, and many people have said that, so why would you want to sell your investment property? Well, I’m in the process of selling my investment property down in Victoria. It’s about an hour away from Melbourne. And it has made some growth in the last, you know, three, three and a half to four years now. So I bought that property at $193,000. I’m selling it for $293,000. And there was a process that I went through in thinking about the sale of this property. So I wanted to talk to you a little bit about it. What are the pros and cons? What do you need to look for? Why would you want to sell property in the whole scheme of things? Is it a worthwhile sale? 

Reasons to sell an investment property?

So we need to remember that everyone’s circumstances are a little bit different. You might decide that you’re a high income earner, and you’ve got capital growth coming through. And it might be not wise to sell. But if you’re in small business, or you’ve just retired from your job, and the income for that year is a little bit lower, or very low, or non existent, then it would be a good time to offload a property. So I’m going to explore that a little bit and give you some ideas around the reasons why it’s done and what you need to think about if you’re looking to do the same. Because in my experience in learning about property investing, I don’t think it is the case of holding it forever. I think there are different times you can be a little bit more creative than just holding forever. And you can multiply the gains that you’ve got even if you are paying tax. So I think the important part is to do the numbers on it. And if you feel that you’re going to get better growth in another market with that money, it might be best to move that on. 

What is the property market doing in your area?

So a couple of key points that I want to explain with everyone today. Firstly, property is at the peak of the market, you know, in terms of this property, is it right now you’ve got to assess that with your particular property, infamy in this property in Melbourne. I would have liked to sell last June, probably July, August, September. Now I had a little bit of an issue with a tenant that didn’t want to move out during that time, and I had to put a position to a particular tribunal to move out. Now I was happy to keep her there as a tenant, but she didn’t allow for the open inspection so it made it very difficult. 

So in saying all this, I would have probably got an even better price on my property back then. So you go through that process, think about what’s actually happening and see what needs to actually happen with the sale. So has the property come to the peak of the market where it is? That’s something that you need to have a think about. Now in Sydney, the market kind of peeked around between February and July of 2017. Different markets would have done different things and individual sales would have been better or worse in different areas. So you really need to get a gauge of that. If there is a frenzy of activity around that time, it’s probably a good time to sell. And you’ve got to think about how long it’s going to last, I think starting to temper off sort of having 10-15 bidders at an auction, you’ve got more like eight. So out of them, you are probably going to have three or four. So you’ve really got to think about where it is in the marketplace at that time. 

How difficult is that property sale, because I had my property in Sydney, which had 50 stairs to the top. And you know, it’s very hard to sell that property to a family, a young family or to elderly people, because they’re not going to like the stairs. So it was very nice inside or renovated and so forth. But the stairs, you know, pull people back, we had three or four strong bidders at the end, which worked well in 2017. But moving forward to 2019, and then 2020-2021, we’re not going to achieve those prices that we did with that property. So that’s a direct example why it was a really good time to sell our principal place of residence. Obviously, it was capital gains tax free, and I’ll talk about that more in terms of the investment property side of things. But you’ve got to think about where the peak of the market is with that investment property that you’re thinking about selling. 

So I guess in future, is it the peak and are you going to see declines in that property market, and that’s a thought process for this property in Melbourne, and I couldn’t see any forward movement in that in the next three to five years, so I want to move my money elsewhere and think about what it is I want to do with that cash available, have made a profit on it. High income earners may decide differently on that. And yet again, you have to look at your own numbers. But in terms of this, I would have ideally liked to sell in July to September last year would have been the peak price. And I may have got another $10 to $15,000, maybe $20,000 out of that particular sale, but you can’t always pick the absolute top, you can’t always pick the absolute bottom, and I made a very good profit on it in a short amount of time. The property again is $183,000 and sold it out to $93. So, nice property in that one. 

What are you going to do with the funds from the sale?

The second point I’d like to make is looked on, you know, are you looking to move that money on elsewhere, or you just kind of put it in the bank. So that’s a decision you may have put in the bank to maybe wait for an opportunity to come up? Are you just putting in the bank to safeguard yourself? So you got to think about where you’re going to put that money.  Is it going to go into another property? Is it going into a business idea? Is it going to do something else in your life, so maybe you want it to take a holiday, you got to think about all these different things. And obviously, I advocate in terms of investing. So my focus on this money would be to, you know, either look at a property investment that I want to take, or put some extra buffers into what’s going on with my property portfolio. And think about the reset I’m taking on and money that I’ve moved into various areas of my investment portfolio, and then also think about my business, and where things are going in that realm and provide even more investment towards the business that I could potentially do to move things forward in terms of what we’re creating here at Search Party Property, and how we can actually look to help more clients in the future and that’s a big one that I want to, you know, focus on. 

With the money that I’ve created, as well, so more investment into the business in regards to what’s happening, he may put a little bit of buffers in terms of having that money available. If there was risk at play, or there was a potential recession coming up, or we wanted to do more with the business in other areas as well, having that cash available is an important one for me. So you’ve got to think about what it is for you, where is that money going to go once you have the profits out of that investment property? 

Capital Gains Tax

The third thing I’d like everyone to think about, is to watch out for the capital gains tax. So you are in a position once you make a profit on a property, that if you’ve held it for more than 12 months (check the dates with your accountant), and there’s a little bit of fiddling around with that. So it’s not exactly the 12 day or 12 months, think about, you know, when you have an exchange on properties, and again, refer that back to your accountant to make sure that you’re within the threshold of reducing your capital gain by 50%. For an end, you pay income on that 50% so that those numbers need to be calculated. So you’ve got to think about what’s actually happening with that property. Also think, are you doing multiple sales within the one year as well? Is that going to then put your income for that year over a higher tax bracket, so you’re going to take your tax bracket into a higher percentage level, again, something that you needed to discuss when encountering now if you’re an employee earning an income that might be $150,000, and you make a profit a profit of $100,000, then you go into a higher tax bracket as well. So these numbers need to be assessed with your accountant to really see if this makes sense. And in what calendar year makes sense. 

So for me, I sold a property in the previous financial year being 2018. And then this went through in 2019 – 2020 financial year, which means that then if that’s the only property, that’s the profit that I’m making on my income for that year. And if I can spread it across two financial years on two properties, the chances are they are going to pay a lower amount of tax. So it’s important to think about these things, whether you want to hold that property as an investment that has made some wealth or is it good to cash out, because the market might decline like it has in Sydney and Melbourne. Somewhere in the realm of 15-20%, it could go down further. So I guess I’m advocating for the whole idea of there’s a lot of activity in those markets, things that the buyer sentiment has declined. Look, there could be growth in the future. If you know the area that I have bought in which is an hour away from Melbourne, it’s a growing market and also I feel like there’s a bit of a supply going into that market as well. And I’ve got a few issues in terms of repairs and maintenance for that property in the next maybe one or two years where it needs a bit of work to be done. And that might cost me another $10-$15K, maybe even $30k, or $40K, to repair some of the things on that house because it does need some work. And that could just blow my profits out of the water. So that’s where you have to really dive down deeply and see if it’s better to just take the money out now, and then move it on to somewhere else to actually get that money working even harder for you. 

So seeing that declining market happen, cash out now, and think about what you can do in future with those funds. So hopefully it gets you thinking a little bit differently because everyone thinks that you hold property for 50 years, 100 years and so forth, but you can be a little bit more creative. If you know what you’re doing, chances are, that you’ll make even more of a profit with that money and use that money more effectively in the future, even if sometimes you have to pay tax on it. So if you want to talk about this topic further, or your circumstances when it comes to property, please give me a call. And thanks so much for tuning in.