Should I sell or keep my investment property?

People often grapple with the question 'Should I sell or keep my investment property?' and it is a common trigger for client's coming to see us.

The question of whether to sell or keep an investment property has always been relevant as people move through different stages of life, for instance:

• Selling an investment property to purchase a larger family home.
  

• Selling an investment property to free up cashflow to pay for private school costs.
  

• Selling an investment property to use the proceeds in superannuation to support retirement.

However, the question of whether to sell or keep an investment property has also become more frequent because:

• Being a landlord in Victoria is hard work: There's land tax, vacancy and short stay levies/taxes, council rates, interest and repayment costs, tenant maintenance costs, agent fees, insurance costs and body corp. fees. This means that cashflow can be a real challenge.
  

• More people are choosing to 'rent-vest' as their first property purchase. As the initial house purchase of many people is not their long term primary residence, there is of course a greater propensity to want or need advice on whether to sell or rent it.
  

• The well documented increases in the cost of housing over decades (house price to income ratio) means that many first home buyers are having to buy inferior properties as their first purchase. In my experience, and explained further in our blog post 'The importance of your first property purchase!', 'inferior' typically refers to low capital growth apartments, whereas as a general rule, it is the land component of the property that actually achieves capital growth.

Understanding Property

It is important to understand that 'property' is not one asset class. Broadly, you could split them into apartments, units/townhouses and houses and compare the different capital growth and income characteristics, however even then they would each vary based on the desirability of the location, the quality of the build and many other factors.

In our blog post 'Shares (ETF’s) or Property: Which is the best investment?' we explain many more of the pros and cons of property.

Property can be a great investment if the combined long term average capital growth and net income yield is higher than the cost of the interest, particularly because borrowing to invest can magnify gains. When this is the case, and the investment strategy fits in with your wider life goals, then it's more likely that retaining an investment property would be beneficial.

However, in many client scenarios, this is not the case.

Many clients may know they have a bad investment property as they have held it for years without significant capital growth, and it may still be negatively geared, or barely positive. And yet, they still hold it.

The psychology behind holding poor returning property is fascinating:

• Firstly, it is due to the sunk-cost fallacy - the phenomenon whereby a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when it is clear that abandonment would be more beneficial. The most common example of this is when people may have paid tens of thousands of dollars of stamp duty and they want to claw back with capital growth before selling, even if that growth never arrives.
  

• Secondly, the conventional 'wisdom' from older generations, commonly parents, is to hold on to property. This was correct wisdom for properties purchased decades ago because in that era, the investment properties people were buying were houses on land whereby they achieved significant capital growth. Now that many people can only afford apartments as their investment property, this 'wisdom' needs to be much more nuanced.

Sell or Keep?

The decision to sell or keep, actually has two factors which we help explore with clients:

• Should the investment property be sold or kept based on the quality of the asset? Here we do a deep dive to understand the long term capital growth and income yield returns, and complete a cost benefit analysis of whether there are better alternative uses of the money. In this analysis, of course we need to consider things like whether capital gains tax will be applicable if sold, and how or if it could be minimised.
  

• Should the investment property be sold or kept based on your life goals? As goal based Financial Planners, our definition of success is helping you live your ideal life.

  
  

  So, let's say you have an investment property that is generating good capital growth, however it is negatively geared. Financially it could be appropriate to retain. However, we would look beyond that to see how it impacts on your other important goals. For instance, let's say by selling the property you could move into your dream family home, send your kids to private school and retire earlier with this extra cashflow: these are the important conversations to be having!

If you need help making this or your next investment decision:

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The purpose of this blog is to provide general information only and the contents of this blog do not purport to provide personal financial advice.  We strongly recommend that investors consult a financial adviser prior to making any investment decision. The contents of the our blog does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this blog is given in good faith and is believed to be accurate at the time of compilation.