Consider These Factors Before Selling Your Investment Property

Consider These Factors Before Selling Your Investment Property

It’s not just the market that can have an impact on the performance of a financial portfolio. Individual circumstances can also dictate the path you’ll take.

Naturally, there are times where investors may wonder if it’s best to sell or keep their investment property. There is no magic formula to determine when to sell an investment property, however here are some key questions you can ask yourself to help you make the most informed decision:

Do you need access to cash?

Perhaps you need money to pay off a debt, capture a better investment opportunity, or redirect it towards upgrading to a new living domain. Selling an investment property is a viable option to improve your cash flow and better your financial situation.

Has your working situation changed? (Have you retired or switched to part-time?)

When you sell your property for more than you bought it for, you make a profit (capital gain) that is subject to a Capital Gains Tax (CGT). CGT is not a separate tax and is charged at your marginal income tax rate.

If you are no longer working full time, you have less taxable income and won’t be required to pay as much Capital Gains Tax upon selling your property, allowing you to keep more of the profits.

Additionally, if you have owned your property for over 12 months, you can get a 50% discount on Capital Gains Tax, so you may want to consider holding on to your investment property for at least that long before selling.

Is your investment property negatively geared?

Negative gearing occurs when your rental expenses are exceeding your rental income. This can be an indication that your property is performing poorly.

However, if the property has future growth potential, it’s a common investment strategy to use the tax deductions and benefits that come with negative gearing to make gains in the long term.

One way to determine whether or not the area you bought into has growth potential is to check the vacancy rates. Increasing vacancy rates may be a red flag telling you to sell before your property declines any further. But if the opposite is true, there may yet be potential, and you should weigh up your options and consider whether it’s worthwhile to wait for the prospective future returns given the initial expenditure.

Is selling the investment property worth your time and money?

Selling a property is not always an easy task; it can take months and you will have to spend on various costs including agent’s fees and marketing fees.

The answer to whether it’s worth the time and money to sell will depend on whether the opportunity costs outweigh the recycle costs.

If an alternative investment opportunity is estimated to increase in value by $250,000 over the next five years, but yours is only estimated to grow by $100,000, that is an opportunity cost of $150,000.

Recycle costs refer to the expenses of trading properties, i.e. the fees you spend on selling your original property, plus the fees you pay when buying your new property e.g. stamp duty.

Constantly turning over your investment properties can be a costly business, so you want to be confident that the opportunity costs will outweigh the recycle costs before selling & buying.