Recent movements in the Sydney rental market have got a lot of investors thinking about selling investment property.
Many see declining rents and an improvement in selling conditions as proof it’s time to cash in and get out of the Sydney market. This is particularly true for areas experiencing a lot of development, as oversupply of new dwellings inevitably leads to higher vacancy rates and lower rents.
However, others see these market conditions – especially with the lowering of interest rates and an improvement in lending conditions as an opportunity to buy another investment property. Some investors are looking for better returns and are focusing on regional areas or other states.
Why sell your investment property?
Beyond being concerned about the state of the market, there are many reasons people sell investment property. This includes:
- Changes in personal circumstances – many life events (like the birth of a child, getting married, divorced, people living overseas realising they will not move back etc.) can change an investor’s priorities.
- Wanting to reduce debt / pay off their mortgage – selling an investment property usually frees up a large amount of capital that can be used to minimise other debts.
- Wanting to buy a new / better home to live in – it is increasingly common to buy an apartment or small house to live in initially, then after a period they have outgrown their place and decide to lease it out. A lot of these owners choose to rent a bigger property and collect the income from their first property, they stay there until they are ready to buy another home for themselves.
Are rents falling in Sydney?
If you believe what you see in the media, yes, Sydney rents have been falling for a number of years, due to the construction boom and an oversupply of rental properties.
For example, here’s what returns (gross yields – not including expenses) you could expect in parts of the eastern suburbs and lower north shore:
Source: Your Investment Property– August 19
As you can see returns are low – you would have to take out expenses, which as a rough guide allow for a minimum of 20% of your rental income for expenses (this doesn’t allow for mortgage / interest payments).
For example, if the rent is $750 per week, that’s $39,000 per year – 20% of that is $7,800 – so you’re left with $31,200.
A property valued at $1,000,000 with a 3.3% return – will show a gross rental of about $33,000.
So investors are asking themselves – can I get a better return on my investment?
Should I sell my investment property now?
The bottom line is, there’s no “perfect” time to sell investment property – there’s only the right time for you.
If you are thinking of selling, we recommend you think about:
- what is your real motivation – your rental income is declining and costing you more money, a change in personal circumstances, a desire to achieve higher returns, etc.
- what you plan to do with the capital released by the sale – buy a new / better home to live in, pay down mortgages / debt, reinvest in another property, etc.
- if the benefits of selling your investment property outweigh the potential returns of holding on to it.
You should also consider the costs associated with selling an investment property, which will likely include capital gains tax on any profit you realise from the sale.