Ask an Adviser - Should We Sell or Keep Our Investment Property

Top answer provided by:

Phil Thompson

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As with any investment it is understanding what risks are involved, and then deciding whether you are prepared to take on those risks to get the benefits.  In the case of an investment property, the biggest risks are. 

1) whether you can find a tenant to pay rent and give you income, and

2) whether you will get any capital growth over time.

In purchasing the property initially you would have been backing your judgment that this would be the case.  Now, 14 years on, things have no doubt changed, both personally and from an investment point of view.  So it is always a good idea to review things periodically. 

From an income point of view - if you can continue to have a tenant paying $460 pw rent, and you are paying interest only on your loan, then the property is likely producing you an income of some $6,000 pa before tax.  If you do not have a tenant for a year then the property is costing you some $15,000 pa in cashflow, before tax.

If having no tenant for a considerable period of time would put you under some financial stress, then there is an argument to say you should sell this asset and reallocate the equity somewhere else.  From a capital growth point of view – if the capital growth over a year would be more than enough to outweigh any potential cashflow loss you had during the year, then holding the property could make sense.

However, there is no guarantee where rent prices and property values go over the year. 

Reallocating your equity into something like your mortgage or a managed investment portfolio (in super or outside super) can be a sensible strategy, particularly if you want to start simplifying your financial affairs, such as leading into retirement.  Paying down your mortgage gives a good psychological benefit of reduced debt, but also produces a reasonable effective investment return on those funds or say 4.5% pa after tax.  Alternatively, managed funds targeting some level of ‘Balanced’ return would be expected to produce an even better return over time.

Further benefits would be having far more diversification by investing in thousands of underlying assets, you are not relying on having a tenant for income, you can sell parts of the investment easily, and you can access funds quickly if needed.  Investment properties and well diversified managed funds are two useful investment tools in the right cases, but each carry different risks and features which you need to be aware of. 

If you are considering selling the property then you need to make sure you understand your capital gains tax position now by speaking with an accountant, and also consider whether there is any opportunity to reduce the capital gains tax payable in the near future, such as should you be retiring and reducing your taxable income considerably perhaps, or making some concessional contributions to superannuation.  With this knowledge you would be better positioned to assess your options.  A Certified Financial Planner can certainly assist you in thinking this all through. 

Kind regards, 

Phil Thompson

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Article by:

Phil Thompson, RISE FINANCIAL

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