Thursday, November 4, 2010

Guest Post: A Graceful Exit-How to Sell an Investment Property

While is usually considered wise to hold on to an investment property for as long as possible, there are certain instances when it is a good idea to sell. Here are some of the cases where selling might be a good idea.

1. Capital Growth
If capital growth hasn't been considerably higher than inflation for at least five years then the asset is no longer worth it and should be sold.

2. Decline in housing demands
If there has been a long-term decline in the demand for housing in the area, selling would be your best choice. There is a good chance that your yield on rental income and capital growth could remain negative for a long time. This would mean that the rise in vacancy rates would mean you would have to service a property loan and it would not be possible to make a claim for any tax deductions.

3. Near retirement
Another time when it would be a good idea to sell an investment property would be when you are getting close to retirement and want an income stream that is ongoing, consistent and also unencumbered. In this case it would be a good idea to go through your portfolio and keep any consistent income performers.

The cost of trading property
It can cost a lot of money to do property trading. Transaction costs can be as high as 10% and you will also have to pay the tax for capital gains. The amount of time that you have been in the real estate market should be maximized whenever possible so that a compound effect can take place.

You should never sell a property when the LVR (Loan to Value Ratio) is under 60% because once it reaches that level you will start to see a positive or neutral cash flow. From that point on, you will be able to enjoy the true income benefits that come with an investment property.

Even if the property value has doubled, it does not necessarily mean that the value will not continue to rise. This is the point where some investors choose to sell and this is usually not the best decision since the rise in value may continue for some time.

Selling because of need
There are certain things to avoid so that you don't end up having to sell due to poor management. Here are a few things you can put in place right at the beginning to make sure that everything goes smoothly down the road.

1. Always have the right insurance
You will need to have landlord insurance and if you have high gearing then you could also get some insurance for income protection. By having the proper insurance put into place you won't have to sell out if anything goes wrong.

2. Always have a plan B
Figure out what would be the worst thing that could happen and plan for it. An example of this would be a vacancy for an extended amount of time. If you plan ahead and know how to handle any problems before they happen you'll be well armed and will not be put in the position where you need to sell in a panic.

3. Look into the future.
What is your cash flow going to be in the future? You should consider future capital gain along with the rental returns you are receiving today, and always create a buffer. Figure in all of the costs that you will have to pay for the five years that follow and have a buffer put in place so that you don't end up selling if you don't really need to.

Having an exit strategy in place should be a key part of investing in the property in the first place. As long as you have created enough buffer and have planned for any shortfalls, you will be able to sell when you want to, not because you need to.

About the Author
This article was written by William. William writes about saving money, property investment and real estate for a home loan comparison service.

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