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Reproduced with permission.
Selling a property always costs money. If you have to sell your property too soon after purchase, before it has had time to grow sufficiently in capital value, you can easily end up with less than you started. This can be compounded further if you happened to purchase towards the top of a market cycle, then sell towards the bottom.
One common mistake that sees people having to sell too soon is failure to factor in their mid-to-long term future when purchasing a property. If the purchase does not fit in with our medium or long term plans, we may need to sell if our life circumstances change. The costs to get in and out of one property, then into your next one, are extremely high, especially if done over a short period of time where limited, or zero compound growth has occurred. This significantly eats into your profitability. This is one reason we suggest you aim to hold each property for at least seven-to-10 years to ride out most property cycles. This helps to remove the ‘timing the market’ aspect of property buying.
Often, family home and relocation plans get in the way and we are forced to sell an existing investment property or home sooner than planned. This is commonly combined with the fact that finances have not been structured appropriately from the time of home purchase and, therefore, options for keeping it as an investment property when we upgrade are limited (due to the reduced tax benefits of holding the property).
The same equally applies if we have an investment property that could become our home later on or if all our debt is deductible, but we plan to purchase a new home in the future. Once again, a strategic financing plan can provide great flexibility and, therefore, opportunity should your plans or circumstances change down the track. This flexibility is ultimately all about allowing you to keep a lot more dollars in your pocket by maximising your deductible interest and not having to sell your property because your loans were poorly structured.
Look at some rudimentary sums. Let’s say that over your lifetime you sell three properties. This is a realistic scenario for many people (think about how many you have already sold up until this point).
Assume the average value for the properties you sell during your lifetime are $600,000, and the average replacement value $800,000. (These numbers are not unreasonable when we project forward over a lifetime and consider average property values in the major capital cities.) What is it going to cost you in purchasing and selling costs along the way? Let’s work through the different expenses involved.
The cost of needing to sell property
- $120,000.00 = Three sets of stamp duty and government costs to purchase @ 5%
- $32,000.00 = Two sets of selling costs @ 2%
- $3,000.00 = Three sets of bank setup and exit fees for each purchase and sale
- $5,000.00 = Five sets of legal/conveyancing fees for each purchase and sale
- $10,000.00 = Up to 3 extra rounds of moving and associated expenses (it’s not cheap)
- $30,000.00 (approx) = Capital Gains Tax
TOTAL = $200,000.00
Excluded Costs
- The ‘opportunity cost’ if you have had to sell due to a lack of strategic financing, selecting a poor quality property or purchasing without considering your long term needs. Often we look back (as many people do) and think if only I was able to hold onto that/those property(ies). This could run into many $100,000s.
- Three periods of your life organising the selling of a property. Value of your time.
- Three periods of your life organising the purchase and/or construction of a property. Value of your time.
- Frustration and anguish of wishing you had not purchased a property and the extra time spent/wasted on the buying and selling process. Level of Stress (what value do we place on this?)
An estimate of the cost is $200,000 of your hard-earned money poured down the drain – so to speak! And this doesn’t include placing a value on the extra time, stress and lost opportunity cost. In my experience the opportunity cost can be the real killer long term!
What if this $200,000 is predominantly after-tax dollars, the figure could be $300,000 or more of earnings subject to your tax bracket. Now, consider how many additional years you will need to work to make up for those decisions, so you can retire or transition into a more flexible working stage of life. This has the potential to be as high as 10% of the total income you earn in your lifetime. Equally, consider the advantage of Property Planning to avoid such financial loss and stress.
This scenario and the sums reinforce the benefits of making fewer (high quality) property decisions to set yourself up to reach your lifestyle goals. Some may need to sell due to lack of equity or borrowing capacity, most commonly when upgrading in order to meet our lifestyle requirements. Notwithstanding this, minimising the number of properties we sell in life, will significantly enhance our overall financial status assisting us to meet out lifestyle goals.
Click here to make a time to discuss your property planning or personalised strategic financing needs or call our head office on (03) 9819 4088.
David Johnston, Managing Director
