{"id":2899,"date":"2022-06-25T10:27:56","date_gmt":"2022-06-25T10:27:56","guid":{"rendered":"https:\/\/royabhishek.in\/urbanbuyer\/should-you-ever-sell-property\/"},"modified":"2022-06-25T10:27:56","modified_gmt":"2022-06-25T10:27:56","slug":"should-you-ever-sell-property","status":"publish","type":"post","link":"https:\/\/royabhishek.in\/urbanbuyer\/should-you-ever-sell-property\/","title":{"rendered":"Should you ever sell property?"},"content":{"rendered":"

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A common property investing rule-of-thumb is that you should \u201cbuy property and never sell\u201d. <\/strong><\/p>\n

\"Buy<\/p>\n

Of course, the rule-of-thumb should be adjusted to include \u201cbuy\u00a0quality<\/a><\/em>\u00a0property and never sell\u201d to ensure you maximise investment returns.<\/p>\n

But the reality is, that sometimes the smartest thing to do, is to sell a property, even if it is a quality asset if it helps you move forward towards achieving your goals.<\/p>\n

I discuss four of the most common scenarios where I have recommended clients sell a property.<\/p>\n

Reason 1: Poor investment returns<\/span><\/h2>\n

Of course, the most obvious reason for selling a property is that its past performance has been poor i.e., a low capital growth rate.<\/p>\n

\"Return<\/p>\n

If the asset’s fundamentals are sound, then it\u2019s likely you should retain the asset.<\/p>\n

Sometimes investing requires patience and discipline, which I\u2019ll write more about in a few weeks.<\/p>\n

My previous analysis concluded<\/a>\u00a0that a property needs to underperform by at least 2% p.a. to warrant selling it.<\/p>\n

Therefore, if a property has only slightly underperformed (by say 1% p.a.), it may not be worth selling because doing so crystalises CGT liabilities and selling costs.<\/p>\n

I believe that there\u2019s almost never a bad time to buy a quality asset (property).<\/p>\n

By extension, that means there\u2019s never a bad time to sell a dud asset.<\/p>\n

Whilst that is true to a large extent, it is wise to be strategic about it.<\/p>\n

A dud asset almost always has one or more impairments (e.g. located on a busy road).<\/p>\n

After all, that\u2019s what makes them duds.<\/p>\n

As such, they can be more difficult to sell in a balanced or\u00a0buyer\u2019s market.<\/p>\n

As such, it is best to sell impaired assets in a buoyant (seller\u2019s) market.<\/p>\n

The rationale is that the high level of buyer demand and positive market sentiment may encourage some potential buyers to overlook the property\u2019s shortfalls.<\/p>\n

Reason 2: Illiquidity<\/span><\/h2>\n

Investment property rental yields are relatively low e.g., a house might yield an income of 2% to 2.5% p.a. of its value and an apartment 3% to 3.5% p.a. before expenses.<\/p>\n

After subtracting expenses such as council rates, insurance, maintenance, property management, and so on, you may receive a net rental income of 1% to 2% p.a.<\/p>\n

\"Property<\/p>\n

An obvious negative attribute of property is that its illiquid.<\/p>\n

That is, you can\u2019t gradually sell down your investment like you can with shares.<\/p>\n

Instead, it\u2019s a case of selling all or nothing.<\/p>\n

Investing a lot of your wealth in the property whilst you are working can make sense because, during that stage of life, you don\u2019t rely on (or need) investment income or capital to fund living expenses.<\/p>\n

However, when you are retired or approaching retirement (or semi-retirement), additional investment income and\/or liquidity gives you more options.<\/p>\n

As such, it is not uncommon for investors to benefit from a change of asset allocation which may necessitate a property sale so that equity can be reinvested more appropriately.<\/p>\n

In addition, having greater liquidity allows you to make gifts (early inheritance) to family members if you so choose.<\/p>\n

Case study<\/h4>\n

I recently developed a plan for a client where he and his wife owned two investment properties and they had diligently repaid all associated debt over the past one to two decades.<\/p>\n

One of the properties was okay from an investment return perspective.<\/p>\n

The other was a dud.<\/p>\n

\"Up\"<\/p>\n

If he retained both assets, he wouldn\u2019t be able to retire within the next two years, because the net rental income from the two properties was insufficient.<\/p>\n

Therefore, my advice was the sell the dud investment property and invest these monies in shares.<\/p>\n

This will derive a higher level of income and allow him to access the capital if required.<\/p>\n

The way I look at it is the investment in property has been a forced savings plan for this client.<\/p>\n

Sure, he could have selected a better-quality asset and generated higher returns, but he didn\u2019t.<\/p>\n

At least he\u2019s gradually repaid the loan.<\/p>\n

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But now it\u2019s time to cash in these savings to help him transition to the next phase of his life i.e. retirement.<\/p>\n

Reason 3: Take profit to reinvest in better opportunities<\/span><\/h2>\n

\"Reinvest\"<\/p>\n

That means there are times when asset classes can be fundamentally overvalued or undervalued.<\/p>\n

Note: it is worth noting that the investment-grade residential property market is a lot less cyclical than all other investment asset classes. It tends to switch between either growth or flat periods, as displayed <\/em>here<\/em><\/a>.\u00a0<\/em><\/p>\n

The commercial property market is a good example of a cyclical market.<\/p>\n

There are times when certain types of commercial property or geographical locations are under or overvalued.<\/p>\n

Case study<\/h4>\n

\"Buying\"<\/p>\n

The tenants of that property (a tech company) offered us a ridiculous amount of money to buy that property in 2020, which we accepted.<\/p>\n

At the time, we were receiving a rental yield of 6.6% p.a. (on the original investment) after expenses.<\/p>\n

The sale price meant we generated a capital growth rate of 9.2% p.a. over 12 years.<\/p>\n

A 15.8% p.a. return (income + growth) is unsustainable.<\/p>\n

Mean reversion<\/a> tells us that a period of below-average growth always follows periods of above-average growth.<\/p>\n

As such, we cashed in and invested our money in more attractive investment opportunities.<\/p>\n

It is worth noting that we were able to eliminate the CGT liability by making a super contribution and the sale helped us upgrade our home.<\/p>\n

Whilst residential property tends to be less cyclical (as noted above), some geographical markets can be exceptions.<\/p>\n

A good example is coastal\/beachside regions.<\/p>\n

These markets can experience boom and bust cycles.<\/p>\n

Most recently, these markets have benefited greatly during the Covid period, and I cannot help but think this market segment is overvalued.<\/p>\n

Sometimes, it makes sense to crystallise a profit, especially if it allows you to adopt a more suitable asset allocation, invest in markets that exhibit opportunities for better returns, or eliminate non-tax-deductible debt.<\/p>\n

Reason 4: Property upgrade (particularly a home)<\/span><\/h2>\n

Another common reason to sell an asset is due to borrowing capacity restrictions.<\/p>\n

Case study<\/h4>\n

Our\u00a0Credit team<\/a>\u00a0developed a strategy for a client that recently relocated to Melbourne (which is a smart move, of course).<\/p>\n

He owns a property in Sydney (previous home) which is worth $2.8 million with a mortgage of $1.2 million.<\/p>\n

This client has two options.<\/p>\n

\"Buy<\/p>\n

Sell his Sydney property and buy a quality home in Melbourne for $3-3.2 million.<\/p>\n

Alternatively, retain the Sydney property as an investment and buy a home for less than $2 million.<\/p>\n

In our view, the second option was inferior because it would mean owning an inferior asset ($2 million was an insufficient amount to buy a quality asset in the client\u2019s desired location).<\/p>\n

This client could sell the Sydney asset now and avoid paying CGT due to the main residence exemption.<\/p>\n

He could then reinvest that equity in a superior quality asset, thereby marking his equity work harder for him on a tax-free basis.<\/p>\n

Sometimes borrowing capacity limitations necessitate selling a property.<\/p>\n

As long as you are buying the same or better-quality asset and transactional costs are minimal, it’s likely you will be better off.<\/p>\n

Don\u2019t forget to plan the long game<\/h3>\n

You should only sell an asset after carefully considering all the pros and cons.<\/p>\n

\"Long<\/p>\n

The\u00a0context\u00a0that a personalised long-term plan provides also aids this decision.<\/p>\n

Let me be clear.<\/p>\n

I\u2019m not advocating selling assets.<\/p>\n

The point that I\u2019m attempting to make is to not necessarily be quick to discount selling assets, as sometimes it is necessary to help you move forward.<\/p>\n