Lets cut to the chase – I don’t believe you should be selling a good investment property unless you absolutely have to. Most properties will be looking after your money and future a lot better than a bank right now. You probably brought your investment property for the long-term goal of making capital gain and providing yourself an income of sorts which hopefully it is doing (if not an income yet than hopefully capital gain). We are adamant that property is an excellent vehicle to assist in financial security.
However, properties sell all the time and investment properties make up a large proportion of these. There are scenarios where selling an investment property could make sense. We are going to try and keep this article reasonably succinct as there is most definitely the possibility for it to get very complicated and “woffley” which will result in you finishing reading with no real answer.
Reasons it could make sense to sell;
Nearing retirement – within the blink of an eye early 60’s has hit and you start to think about income to do the things you enjoy when you are no longer working. All of a sudden, your nice 4 bedroom investment in the suburbs worth $900,000 and returning $775 per week doesn’t look as enticing as the 3 flat property for sale for $825,000 and returning $1100 per week. As your income reduces that extra $425 per week will go a long way.
Did you get in a little deep – struggling to cover the mortgage payments/maintenance expenses/rates/insurance? It happens for multiple reasons. While property was climbing in value you thought you would stretch yourself and buy one more investment property in the hope of making some easy capital gain/equity. Now the market has changed, and you realise that you may be staring down the barrel of a flat market for who knows how long while topping up the property by a couple of hundred dollars a week
You are outside the bright-line test – This is not really a reason to sell per se but a reason not to sell. From the IRD website – “If you entered into an agreement to purchase residential property on or after 29 March 2018 and sell it within 5 years, you’ll need to consider if it is taxable under the bright-line test. If a property was purchased on or after 1 October 2015 through to 28 March 2018, the bright-line test will look at whether the property was sold within 2 years. The bright-line test doesn’t apply if the property was: your main home. transferred as part of an inheritance, transferred to you as an executor/ administrator of a deceased estate.”
Have an unexpected event pop up or starting a business – you may be starting an exciting and potentially profitable business that needs an injection of capital to get off the ground. Weigh it up, is the reason you brought an investment property for this very event? If you did it could make sense to sell. Along a similar vain you may have the unfortunate experience of being diagnosed with a sickness that requires money for treatment. Again, is the reason you brought an investment property for this very event? Absolutely zero point in owning a bunch of investment properties if you are not alive to enjoy the benefits.
Reduce interest paid on your own home – this is another valid reason for selling I believe. Although there is nothing wrong with being in debt, if a sizeable mortgage must be against your personal home instead of loading it all against an investment property, you may be at a time of life when reducing that mortgage is worth a lot to you.
Your property is underperforming – perhaps the home you brought just isn’t stacking up. Large sums may be going towards maintenance or after you had brought you realised that due to its location/lack of sun/access etc that it just wasn’t achieving the gains you thought it would. Possibly it has been a difficult property to tenant. All the reasons it could be easier to sell and invest your money in a “better” property.
You have a better place to put your money – it is no secret that property isn’t the only place that you can try and grow your money. Think bitcoin is your ticket to wealth? Go for it!
You are losing sleep over it – as human beings, we have different skills in different areas. Some people just don’t enjoy being a landlord and dread receiving that phone call to say a tap is leaking, the dishwasher has given up the ghost or even worse, the tenants have done a runner. If it is all causing you unnecessary stress it may be easier to put your money elsewhere. The day of writing this I am heading out for the third time in a very short period of time to fix small things on a property I own (dishwasher, door handle mechanism, leaking/loose sink tap, and the letterbox coming off its stand). It can take up time. It is a hard thing to do, but if you wanted/needed to sell and you anticipated wanting to get back into the rental market later on, TRY to do it during a flat period in the cycle.
As an example, you would have been burned a whole lot less if you were out of the market during the 2010-2014 period compared to 2015-2018 in Wellington. Over the last year in Auckland, you would also have not made a lot of profit overall. If this carries on in Auckland (crystal ball to some degree) it may not hurt you too much to have less skin in the property market at the moment. As mentioned, anticipating the market is a very difficult thing to do and there is always a cost with selling. Hence not selling is usually the best thing, ride the ups, flat patches, and downs for what is usually end gain.
# I am by no means a financial or life advisor but it sometimes doesn’t hurt to hear things from another point of view to get the juices flowing in the brain.
Happy house hunting.