Expert Advice with Simon Buckingham 01/07/2018
In the last article we began debunking the myth that you should only ever buy and hold property, but NEVER sell.
We concluded that when it makes financial sense for an investor to sell a piece of real estate in order to move their investing forward (compared with holding onto it and being stuck in a rut), a sophisticated property investor will sell.
"But... What About TAX?"
Many investors are reluctant to sell an investment property because, if they do, then they may have to pay capital gains tax on any significant increase in the property's value since it was purchased.
Here's the thing... Tax is a natural consequence of making money.
If you make money by realising a profit, then - yes - chances are you'll have to pay some tax.
But the point is that you've made money!
By all means, consider the tax consequence when timing a sale - and plan for it in discussion with your accountant. But don't be afraid of it.
If you're holding on to under-performing investment properties simply because you’re afraid of paying tax on any existing gain, and are tying up equity and/or borrowing capacity that you could otherwise be using to MAKE money, then you need to ask yourself WHY you are investing.
Are You Investing To Make Money, Or To Save Tax?
Saving tax is easy - just LOSE money and you'll get a tax deduction!
Unfortunately however, the tax deduction is normally less than the loss incurred - so you're net out of pocket at the end of the day, even with the tax deduction.
Personally I'll take making money and paying some tax, over losing money to save tax, any day of the week as a wealth-building strategy. How about you?
"But The Stamp Duty Costs On the Next Property Are Dead Money!"
Less sophisticated investors often subscribe to the view that you shouldn't sell one property to buy another, because you'll lose out in having to pay stamp duty again on the next one. And they fret that this erodes any profit they may have made on the first property.
But if you were really worried about paying stamp duty again, then you'd never buy more than one investment property!
The fact that you'll have to pay stamp duty on your next purchase shouldn't have any bearing on the choice of holding versus selling a property.
If you want to buy your next property, either to replace an under-performer or simply to expand your portfolio, then you're going to pay stamp duty. So don't stress about it.
"What If I Can't Buy Back Into The Market At The Same Price That I Sell?"
Another reason why many investors are afraid to sell, even if their property isn't really making them any money, is that they feel (especially in the current financial environment with tighter borrowing restrictions) that they might not be able to buy back into the market in the same price bracket.
Plus they worry that after allowing for tax, selling costs, and also the purchasing costs for the next property, they might not be able to afford a property worth the same or more than their current investment.
My response to this is: "So what?"
We’re talking about an investment property here, not your own home.
Assuming you're investing to MAKE MONEY, then the actual value of the next property you buy is far less important than the PROFIT that you can make from it.
If a sale allows you to go on to make more money than you would if you just held onto the current property, then - even if it means your next property is a cheaper property - what makes more commercial sense: Holding the current property... or selling it?
In the final part of our 'Property Investing HERESY' series, we'll reveal the fundamental flaw in the strategy of borrowing against one property after another to build a portfolio, and why this strategy has become redundant in the current market.
Then we'll bring everything together by asking a vitally important question that many investors overlook...
(Meanwhile, if you’re keen to invest smarter and avoid common property investing mistakes, then check out this free report on “How NOT to Stuff Up Your Property Investing!”
Simon Buckingham is Director of Results Mentoring and a highly experienced investor. Simon has been investing in property for over 15 years using a broad range of strategies including positive cash flow, renovations, property development and commercial properties, both within Australia and overseas.
Holding university degrees in Commerce and Law, and with over 10 years' experience as a business consultant, Simon turned his back on corporate life forever following the births of his two children and now spends his time investing, developing property, supporting multiple charities, and building businesses - while teaching others how they can do the same. He has personally coached hundreds of investors in techniques that can be used to profit from property in any market conditions, regularly facilitates public workshops and provides other free resources for property investors through ResultsMentoring.com, and has presented to thousands of people at property conferences and seminars around Australia and New Zealand.
Simon writes the highly regarded Sophisticated Property Investor e-newsletter and his opinions on the property market and real-world investing strategies have featured in Your Investment Property magazine, Smart Property Investment, Channel7 News at 6, Kevin Turner's Real Estate Talk, and Property Observer. He is co-author of the critically acclaimed property book The Real Deal: Property Invest Your Way to Financial Freedom, and a founding Mentor in Australia's award-winning personal mentoring service for property investors: the RESULTS Mentoring Program.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.