Selling One Property to Buy Another Property For Better Investment Returns - Is It a Good Idea?
At some point, nearly every investor will discover themselves wondering whether or not they ought to keep their current investment property or sell up to have a better carrying out one. May be the grass really eco-friendly on the other hand, or should investors stay with what they have got?
This scenario is a common one and often comes about because the investor feels they haven't received a sufficient return on their current investment or because they want to buy in another "hotspot" area and can't afford to hold both investments. They're looking for property that perhaps has better money-making potential at a faster rate of growth. So, which of the two courses of action - to sell or to hold - is going to deliver the best outcome? At first glance you may think the answer is obvious. But is it?
I believe the buy-and-hold strategy is the surest way to wealth creation through property (not to say that there isn't a time and place for other methods). However to successfully implement this strategy, you must resist the temptation to sell. With the above scenario, my general advice in nine out of ten cases is to actually hold the existing property. When you add up the transaction costs in selling and then buying, and the price you can afford to pay for the replacement property, the figures usually don't stack up. At least not for a long time anyway.
Allow me to provide you with a fairly simplified illustration of why you need to rarely sell (please be aware figures are estimations only as various transaction costs alter from condition to condition).
Think that you've a good investment property worth $400,000 that you just bought for $200,000 (including all buying costs for instance stamp duty etc) 10 years ago. Let's say it's prone to generate 6% each year capital growth. In 10 years' time this property will probably be worth roughly $716,000.
You may think you will be able to generate a better capital growth rate of about 8% per annum if you purchase in another area, so you consider selling this property. If you sell the property for $400,000, you will attract standard expenses of real estate agent fees, advertising costs, and legal/conveyancing fees. Depending on where you live, these could equate to around $15,000 all up. This leaves you with $385,000. You will also have to pay capital gains tax on the gain of $185,000 ($385,000 - $200,000), which let's say is about $41,000 at the discounted capital gains rate of 22.5% (50% discount applied to the top marginal income tax rate). This will now leave you with $344,000. Now to purchase a new property, you need to allow for standard expenses including stamp duty, legal/conveyancing, and inspection costs. Let's average these at a total of $15,000, again these will vary depending on where you live. With what's left you will probably be able to purchase a property for around $329,000.
Let's assume you receive a property for $329,000 which does generate 8% each year on that new property purchase. In ten years' time, this new property will probably be listed around $710,000, Under the requirement for the first property should you have saved it. So despite ten years, you'd have still been best along with your original property. It'll really take 11 years for your new property to build up in value greater than the requirement for the property you agreed to produce the entire situation worth the effort.
And this whole process, in terms of transaction costs for buying and selling, cost an average of $70,000! You'd be better off holding your existing asset and if you could afford to, leveraging the equity in the property to fund your next investment property when you're ready. Instead of blowing that $70,000 on expenses which leave you with nothing to show, use it to invest further.
Generally, In my opinion you will discover really only three situations that you ought to sell property supposing you have a choice. The foremost is once the neighbourhood is lowering. Elevated crime together with other unsavoury activities which decay a location, might point to ignore the won' more be well worth the cost inside a very long time. Next, selling is alright if you are ready for retirement and selling part of your portfolio may be the way to derive an earnings. And lastly, in the event you honestly think you could generate substantially superior returns elsewhere. As you have seen in the last example, a few percent each year typically takes ten years or maybe more to produce enough return only to break even. You need to be talking about not just a handful of percent each year to consider selling.
Of course, if selling an existing property wasn't part of the equation, then I would certainly advocate buying property that is likely to deliver the best rate of growth compared to another. Using the previous example of a $400,000 investment at 6% per annum versus the same investment at 9% per annum, over 20 years that relatively small 3% difference equates to almost $1 million in extra value than the 6% growth alternative.
This scenario is a common one and often comes about because the investor feels they haven't received a sufficient return on their current investment or because they want to buy in another "hotspot" area and can't afford to hold both investments. They're looking for property that perhaps has better money-making potential at a faster rate of growth. So, which of the two courses of action - to sell or to hold - is going to deliver the best outcome? At first glance you may think the answer is obvious. But is it?
I believe the buy-and-hold strategy is the surest way to wealth creation through property (not to say that there isn't a time and place for other methods). However to successfully implement this strategy, you must resist the temptation to sell. With the above scenario, my general advice in nine out of ten cases is to actually hold the existing property. When you add up the transaction costs in selling and then buying, and the price you can afford to pay for the replacement property, the figures usually don't stack up. At least not for a long time anyway.
Allow me to provide you with a fairly simplified illustration of why you need to rarely sell (please be aware figures are estimations only as various transaction costs alter from condition to condition).
Think that you've a good investment property worth $400,000 that you just bought for $200,000 (including all buying costs for instance stamp duty etc) 10 years ago. Let's say it's prone to generate 6% each year capital growth. In 10 years' time this property will probably be worth roughly $716,000.
You may think you will be able to generate a better capital growth rate of about 8% per annum if you purchase in another area, so you consider selling this property. If you sell the property for $400,000, you will attract standard expenses of real estate agent fees, advertising costs, and legal/conveyancing fees. Depending on where you live, these could equate to around $15,000 all up. This leaves you with $385,000. You will also have to pay capital gains tax on the gain of $185,000 ($385,000 - $200,000), which let's say is about $41,000 at the discounted capital gains rate of 22.5% (50% discount applied to the top marginal income tax rate). This will now leave you with $344,000. Now to purchase a new property, you need to allow for standard expenses including stamp duty, legal/conveyancing, and inspection costs. Let's average these at a total of $15,000, again these will vary depending on where you live. With what's left you will probably be able to purchase a property for around $329,000.
Let's assume you receive a property for $329,000 which does generate 8% each year on that new property purchase. In ten years' time, this new property will probably be listed around $710,000, Under the requirement for the first property should you have saved it. So despite ten years, you'd have still been best along with your original property. It'll really take 11 years for your new property to build up in value greater than the requirement for the property you agreed to produce the entire situation worth the effort.
And this whole process, in terms of transaction costs for buying and selling, cost an average of $70,000! You'd be better off holding your existing asset and if you could afford to, leveraging the equity in the property to fund your next investment property when you're ready. Instead of blowing that $70,000 on expenses which leave you with nothing to show, use it to invest further.
Generally, In my opinion you will discover really only three situations that you ought to sell property supposing you have a choice. The foremost is once the neighbourhood is lowering. Elevated crime together with other unsavoury activities which decay a location, might point to ignore the won' more be well worth the cost inside a very long time. Next, selling is alright if you are ready for retirement and selling part of your portfolio may be the way to derive an earnings. And lastly, in the event you honestly think you could generate substantially superior returns elsewhere. As you have seen in the last example, a few percent each year typically takes ten years or maybe more to produce enough return only to break even. You need to be talking about not just a handful of percent each year to consider selling.
Of course, if selling an existing property wasn't part of the equation, then I would certainly advocate buying property that is likely to deliver the best rate of growth compared to another. Using the previous example of a $400,000 investment at 6% per annum versus the same investment at 9% per annum, over 20 years that relatively small 3% difference equates to almost $1 million in extra value than the 6% growth alternative.
About the Author:
Want to find out more about Caspian, then visit Benny Lau's site on how to choose the best singapore condo for your needs.