Deciding when to sell your investment property is often a delicate balancing act. There are a variety of personal, logistical, and financial reasons that could be motivating you to sell. However, selling your property sooner than you originally planned could mean missing out on significant capital growth.
Here we explore the wide range of factors you should consider when determining when to sell your investment property. We will take a closer look at the personal circumstances, market movements, and financial considerations that drive investors to sell. We will also outline the key factors influencing the ideal campaign timing, once you have decided to sell.
Deciding when to sell your investment property
According to some investment experts, there are only a couple of reasons you should consider selling an investment property. This is based on the belief that, the longer you hold a property, the greater the financial benefit. However, this is not always true, and there are a range of situations where selling may be the better move.
When considering when to sell your investment property, you need to work out your holding costs. As part of this, make sure you include all of your expenses, including management and insurance fees, and maintenance costs. Also think about both the immediate (fees, capital gains tax, etc.) and opportunity (potential future capital growth) cost of selling.
Doing this calculation will help you to work out whether the property is actually making you money. And, if it’s not, how long you can afford to hold it, and if it could be profitable in the future. It should also help you make an informed decision about whether the reason you are considering selling is worthwhile.
Common reasons to sell an investment property
The holding costs are eating into your returns
Depending on your investment strategy, you may be comfortable with making a loss in the short term. However, for your investment to be profitable, this needs to be offset by capital growth over the longer term. As such, there is a limit to the ongoing out-of-pocket expenses you can reasonably cover.
Acknowledging this, if the cost of holding your investment property is significant, selling sooner may be the best move. This would allow you to minimise your future losses and, depending on market movements, potentially even achieve a small profit. It should also reduce the stress on your personal finances and help ensure you can continue maintaining any other investments you might hold.
It is worth noting here that negatively geared properties provide some financial benefits that can impact holding cost calculations. In particular, many rental expenses can be claimed as deductions on your tax return, which reduces your taxable income. This can help offset your ongoing expenses – though only if you can comfortably cover the out-of-pocket costs.
The property’s performance is not what you expected
When you bought your property, you most likely had some idea about the returns it would reasonably deliver. Generally, this would be based on recent market performance, anticipated market movements, and projected growth. However, investment performance is never guaranteed and sometimes, even with the best modelling and analysis, you can get it wrong.
This is because the property market is notoriously dynamic, and investment performance can vary greatly across locations and property types. Its movements are also influenced by a wide range of factors, making them quite difficult to predict. As such, it is possible that previously strong demand for a property could suddenly, and unexpectedly, decline.
In some situations, this might be OK – like if capital growth is slower than forecast, but still reasonable. In others, underperformance could seriously compromise your long-term investment plans – like if your rental returns are much lower than expected. In these situations, selling your property would allow you to redirect your capital to other, higher performing assets.
Further investment is required
Investment properties tend to age quicker than owner-occupied properties, particularly if there is regular tenant turnover. As a result, additional maintenance may be required to keep your property looking its best and delivering reasonable returns. Depending on the condition of your property, this could be minor (repainting, etc.) or much more significant (a full renovation).
If more major works are required, carrying them out could be very expensive and time consuming. As such, you may not be willing or able to commit the extra capital – and energy – to complete them. Depending on the property’s performance, you may also feel the potential returns do not justify the additional investment.
In this situation, selling could allow you to realise some capital growth, without needing to make any further investment. However, it is important to understand the full cost of this approach, including the loss of potential future growth. It is also worth considering the pros and cons of renovating your rental property, including the potential financial benefits.
Economic and regulatory changes
The rules and requirements governing property investment and the provision of rental accommodation are constantly changing and evolving. The economic conditions property investors need to navigate, including financing and taxation arrangements, are also extremely dynamic. And even small changes to either of these factors can have a big impact on an investment’s profitability.
For example, as we have recently seen, rising interest rates can put significant strain on property investments. This is because, as interest rates rise, so do your holding costs and the capital growth required to offset them. As a result, selling can seem like a good way to reduce short-term financial pressure and release some additional capital.
Similarly, we are currently seeing the substantial impact regulatory changes can have on the rental market. Down in Victoria, new minimum standards are being implemented, which require expensive upgrades to be made to many rental properties. This has resulted in a wave of investors choosing to sell their properties to avoid the additional cost.
Would you like to receive our investor newsletter?
Click and Subscribe to our newsletter and get instant access to our exclusive e-book — absolutely free!
|
|---|
Your personal situation has changed
Chances are that the reason you got into property investing was to build wealth and secure your financial future. As they are longer-term, to achieve these goals, you usually need to have a reasonable level of personal stability. This is because most significant life changes will have some financial impact and could require you to free up capital.
For example, if you separate from your partner, you may need to liquidate your assets to enable a fair division. Similarly, if you lose or change your job, you may need to minimise your ongoing costs and maximise your liquidity.
You may also choose to sell your investment properties if a situation causes – or forces – a change in your priorities. We often see investors looking to sell investment properties when they retire, to release capital to fund their lifestyle. Serious health issues can also drive investors to sell, as they look to reduce stress and simplify their life.
You want to capitalise on a hot market
Property market movements are largely cyclical, with both rents and property values rising and falling over time. As such, it is logical to plan when to sell your investment property based on when prices are peaking. And you may be especially tempted to sell when you see similar properties to yours achieving record results.
It is worth noting here that trends in sales results tend to be quite localised. As such, when monitoring market performance, it is important to focus on comparable properties in the same area. If you are thinking about selling, you should also consider engaging a local market expert to provide a detailed valuation.
Planning when to sell your investment property
Whatever your reason for selling, the exact timing of your sales campaign can have a significant impact on the outcome. As such, there are a range of factors you need to consider when choosing when to sell your investment property. This includes the type and location of your property, the state of the market, and your personal and financial situation.
When selling an investment property, you will also need to decide whether to sell with tenants in place. If your property is most likely to be bought by another investor, having it tenanted could add to its value. But, if your buyer is more likely to be an owner-occupier, it could be worth waiting until your tenants vacate.
Is now the right time to sell my investment property?
If you need help deciding when to sell your investment property, contact Local Agency Co. Our experienced team can work with you to assess both the cost and potential benefits of selling. We can also provide detailed advice on the ideal timing to achieve the best possible sales result. We recommend you seek professional advice, so you obtain the best possible advice based on your situation.
CLICK HERE TO SPEAK WITH AN EXPERIENCED LOCAL PROPERTY MANAGER