Apr 25, 2022
hi everyone thanks very much for tuning back into the show so in today's episode i want to discuss the question should i sell some or all of my properties and the reason is i could potentially buy other properties that i believe would potentially outperform my current portfolio so please note before we go any further as everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions so what i want to talk a bit about today is taking an honest look in the mirror and then basically deciding about you know whether the properties i own are actually ideal and so i think the answer is that they probably aren't ideal um and that i personally think that if most investors were to ask themselves the same question then deep down they would probably agree and wish that they could sort of magically switch their property to another had they um be given the choice so um basically the reality is uh the transaction costs of transacting and property are extremely high so you know there are cgt implications for selling and then stamp duty on the way in on the new purchase you know plus real estate agent fees you know which are often two percent plus and then you've also got marketing costs um conveyancer uh and then you know even if you want to use say a buyer's agent for the new purchase you know that's going to be an additional cost as well plus the conveyancer on the new ones so basically you know the costs just go on and on um you know that forgets about sort of building and pest inspections and all other kind of things you'd want to go through um you know when buying another property as well um so when you add all of this up you can see that you are actually going to really need to make an outsized gain on your new purchase versus your existing property just to make it worthwhile and so i think that one of the best things about real estate is that you know even if you were to panic one night and then you know just think oh no i've made a bad move buying the property it'll potentially take months to unwind that transaction and so you may be effectively forced to think about it more and then end up just holding the property um and if you look at a lot of the success people have had over the years investing in property it has often been related to buying and holding for a very long period of time so you know the argument i guess you could make is that by making it harder to transact and more expensive to transact people are more likely to hold for the long term and you know the long term uh holding is where you could potentially make the really outsized gains now all of this changes if you are going to be an owner occupier because you know in that case then you should seek tax advice but in that case you know you may receive the capital gains tax exemption um and then you know if you were to say trade up and buy another property yes you do lose some transaction costs but the cgt is really just the most painful part of the transaction in my opinion and that's what makes it really hard to do this kind of transaction um you know because it's just such a large amount and you really need to seek an accountant's advice regarding the capital gains tax as well because depending on the time frame you know there may be the rules where you're able to live in the property first and that kind of thing so definitely see an accountant the other thing i want to address is that a lot of people um in the property investing space you know they talk about buying a property and then continually refinancing it up to say like an 80 lend and then the idea is that as it goes up in value that you potentially look to keep refinancing it back up to that 80 level again continually releasing the equity and then using those funds to then expand the portfolio and so this is a strategy that you know many property investors and buyers agents and everyone have sort of advocated for over the last couple of years and you've probably seen people with the white boards and that kind of thing um now what i want to add to this and what they don't tell you is that let's go through a specific example so let's say you do really well you bought one of these low value high yield properties for 200 grand let's say you bought in mount druitt let's say you bought maybe 20 to 30 years ago now so i'm thinking um you know sub 2000s maybe 1990 i'd have to check price records but i think if you were to go back that far you would potentially find a house you know maybe maybe closer to 30 years but if we say 20 30 year time horizon 200 grand purchase price and let's say fast forward to today let's say that was a big freestanding house at the time and let's say today it's worth 1 million and look these numbers again i'm just using round numbers now let's say in this example you actually kept the property on interest only for the entire duration let's say you refinanced it up to 80 every time and so the total loan would now be 800 000 against that 1 million value now this obviously assumes you qualified each time to refinance and everything like that that's a whole separate calculation but uh basically you know that's the the numbers that i want to work with so you started at 200 grand purchase price current value a million you've continually refinanced it up to 800 000 along the way now what people don't tell you is that and you do need again get tax advice is that you will be potentially liable to pay capital gains tax on the entire gain so for example if it's now worth one mill and you know it's purchased at 200 000 there's an 800 000 capital gain there and so again seeking tax advice um you know the accountant may advise that you might need to pay for capital gains on it uh which you know typically is near a 50 um amount if you're at the top tax bracket and then you'd get that 50 exemption on that so we're going to use a round number of 400 grand you know after the discount is half of the 800 grand profit and then you're gonna pay nearly fifty percent on that so basically the tax bill we're going to round to 200k in this figure it is probably going to be a little bit less depending on your circumstances uh but give or take 200k now if you look at this example further so the value of the property is 1 million you let's say you sell it tomorrow you um pay off your 800 grand mortgage you pay the real estate agent they're 2 fee you pay the marketing costs you don't even have 200 000 left over to pay the tax man so effectively you don't have any equity um that's actually going to come out of that property when you sell and so a lot of investors that you see that have accumulated these large portfolios it's sort of an illusion the amount of equity that they have because there could be a huge lumen capital gains tax bill that if they were to sell up they'd be left with virtually nothing and this is just something a lot of people don't tell you about so that's something i wanted to address today um again please note this isn't tax advice um you know capital gains tax and everything is going to differ depending person to person um so you should seek an accountant's advice and on that but from a financing standpoint you know this is something that investors need to keep in mind when they are continually releasing equity from their portfolios so i guess just you know always remember that what is happening in the background might be different to what people are actually telling you and behind the scenes you know things aren't often as rosy as you would expect and um i guess just on that note as well in case you are maybe feeling like you could be doing better in your life um i do want to share something else so with you i see everyone's financial position and i can tell you you know if you have built your own wealth even if it isn't in the multi-millions as yet you should feel proud of yourself you know it is hard to get ahead these days cost of living is getting higher and you know the honest truth is that a lot of people i do see are being given money by their family uh pre their parents being passed away and um you know normally this does relate to property it's not unusual to see gifts exceeding quarter of a million if not into the millions um in a lot of cases so you know if you see some people and they're sort of enjoying this outsized life that you don't think is filled with debt and they own these assets that are values that you can't comprehend how they actually you know acquired those based on uh you know their source of wealth um then you know i can probably assure you that in the background there is a bit more to the story and uh and often that it is that family has passed through those funds earlier so you know if you are by here uh you know here by definition you know working on building your own world um you know you're spending your own time improving your financial literacy and taking responsibility for your wealth creation you know this should hopefully not only benefit you but also your family and society and so i guess look um you know today being a public holiday i just wanted to say pat yourself on the back for spending a couple of minutes to go through this with me um you should feel proud of the hard work that you're doing the savings that you're making the investing you're doing and a lot of people out there do have it a lot easier probably than what you do and that being said of course we want to be very grateful for the amazing opportunities we have where we are in the world and um you know our thoughts and prayers to everyone who is in a more difficult situation at this moment um so please note as always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions i really appreciate you tuning in as always thank you so much