When is the right time to sell your investment property

Written by view.com.au in Investing

An white concrete investment property set in front of a blue sky

During the process of real estate investing, the decision to sell an investment property, whether you own commercial property or a number of residential investments, is not to be taken lightly and should always be done following a thorough consultation with your financial advisor. The most common time when investors sell is either when flipping a property, consolidating finances or when retiring. However, there are other occasions where you may consider selling.

The decision of when to sell an investment property

You are retiring

One of the most common reasons to sell an investment property is to free up capital for your retirement.

You may be able to save on tax by investing a portion or all the proceeds that come from the sale into your superannuation fund, and you may be able to make after-tax contributions of up to $300,000 over three years if you’re under 65.

Be aware that when you sell an investment property after retiring it may affect your Age Pension entitlements.

Selling an investment property: Senior couple are smiling for the camera while standing in front of their home.

You are not getting a good return on investment

You can measure whether your investment property is performing for you in two ways: yield and capital growth.

Your yield is what income you receive through the investment, usually through rental payments. It’s easy enough to calculate the figure of your yield (and you should know this off the top of your head anyway), but if for a $500,000 2-bedroom apartment, you receive $450 a week from your tenants, then you receive $23,400 a year in rent. Subtract any costs you have for maintaining the property (council rates, interest, accountant, repairs, water rates, insurance etc.) from this income, e.g. $4000. So, your income is $19,400.

Yield calculation: $19,400/$500,000 x 100 = Rental yield of 3.9%

Compare this figure to your mortgage payments to ascertain how your investment affects your cashflow and whether it is negatively, positively or neutrally geared. If you own considerable investments and have a significant amount of equity that has grown from capital growth, you may want to look outside of cash-on-cash return and instead evaluate whether your equity is being used efficiently.

The second measure is capital growth. It is harder to get a precise value for your home, but through market research you can have an accurate property estimate, or even pay for a professional valuation to be made. From this you can see to what degree your property has increased in value.

If your investment isn’t ‘performing’ it may mean it is negatively geared, where it costs you more than you earn from the investment. Many investors claim this expense on their taxes, which is called negatively gearing. This may make the investment viable in a sense and helps investors get into higher cost markets with potential for higher capital growth, but you need to be aware that this is still costing you money and is a financial pressure.

You want to invest elsewhere

It is rare that an investor will want to redirect their finances after selling an investment property towards buying an investment property elsewhere, but it does happen. If you have found an investment opportunity that is sure to provide a better return on investment, then this may be worth your while (after considering the costs of selling and buying). However, unless your existing property is clearly underperforming and shows signs of dropping in value significantly, it is usually the smarter option to keep hold of your investments as property is often a long-term game.

You want to benefit from capital gains tax exemptions

Make the most of Capital Gains Tax exemptions if you live in your investment property immediately after you buy it, for at least 12 months (this halves your capital gains tax), and sell it within 6 years. In this case you continue to claim that property as your Permanent Place of Residence (PPoR). This may not be worth your while if you have invested in slower growing properties, such as units, but if you have invested in a house which attracts significant growth due to the land it sits on, then it may be worth making the most of this tax exemption.

If you foresee changes to your income, be they temporary (maternity leave, extended holidays), and know that this will place you in a lower tax bracket, you can potentially make the most of this by selling your property before the end of that financial year.

You can also deposit profits from the sale of an investment into your super account, saving on how much you are taxed. For those over the age of 55, you can increase the amount you can deposit into your super.