Rules are an important part of life. And rules in most cases, are really just another word for common sense. They give us a clear framework around many important aspects of life, so it’s no surprise when it comes to selling your investment property, there’s a number of rules you need to follow in order to get the best result.
If you want to know when to sell an investment property, or even if selling an investment property is a good idea, all you have to do is read the rules.
RULE #1 LET YOUR PROPERTY DO ITS JOB
Property investment is not the same as property developing or buying, fixing up and flipping properties. They’re different wealth propositions, so you need to be clear about what being a property investor actually is. Without that knowledge you might be expecting the wrong outcome from your investment properties and be selling when you should be holding.
Investment properties are a way to create passive income, i.e. money in your pocket that you haven’t worked for. The way investment properties create income is through rent incomes and regular increases in rental rates.
Another way investment properties create wealth for investors is to increase in capital growth. While we may not be able to live off that growth, we can use it by extracting equity out of properties and using that cash to buy another property, thus creating another rental income.
Investment properties also provide investors with various tax deductions, which again while we may not live off, we can reap the benefits of those savings.
In short, if your property isn’t holding you back, if it’s generating passive income and has given you back any deposit amount you paid in at purchase, it’s doing its job. The property is providing you with passive income and asking very little, or anything at all, from you. So hold onto it and leave it alone.
RULE #2 QUIT THE COMPARISON CONCEPT
If you’re a few years into your property investment journey you may have a number of properties. Hopefully you’ve followed some of the other rules of real estate investment and you have properties in various locations, some houses, some apartments. Each property will be working in its own specific way. Perhaps some of the properties have multiple tenants and create more than one income stream. Perhaps some are in place economies and are attracting renters who are willing to pay top dollar just to reside in that post code.
The rule here is not to compare apples and oranges. A property that is split in two and gives you two incomes, may not be increasing its capital growth as fast as say an apartment in a place economy. But remember rule number one – you need to let each property do its job. Your duplex is creating more than one income stream – huge tick for your cash flow. If it keeps doing that, and you’re able to regularly increase the rental rates, why does it need to double in capital growth as fast as another property? Remember capital growth is a vanity metric. It might be nice to say your property has doubled in value, but you’re not living off that growth, so quit comparing and appreciate what’s working.
RULE #3 THINK BEFORE YOU SELL
Ask yourself why you want to sell. If it’s because you aren’t seeing the capital growth you’d like? Refer to rule two.
If however, you aren’t seeing the rents you want, and are having to top up the mortgage out of your own pocket, you still need to stop and think before you decide to sell.
Ask yourself what is stopping rent increases. Is it something that can be fixed? Would a new kitchen and bathroom, air-con or granny flat in the garden, be the golden ticket to higher rent rates? Ask yourself if you can improve the property’s ability to attract higher rents and weigh the costs of those improvements against the next 15-20 years of rental income.
Buy well, never sell, is a motto successful property investors live by. The costs and tax involved in buying and selling properties can be significant, so selling too fast will eat into any wealth from capital growth you may have seen.
LEARN THE RULES THEN PLAY THE GAME!
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