Should I sell to cash in on my capital gain?

Albert Einstein called compound interest “the greatest mathematical discovery of all time”.  

I totally agree with him particularly when it comes to property investing. Compounding is like dynamite to a property portfolio where capital growth gets stronger and stronger as more and more time passes. Time being the operative word!

So the question begs, why is it that so many people don't hold property for the long term? - or better still, forever?

For instance, the stats show that around 50% of people who buy an investment property sell up in the first five years, and those who stay in the game ~72% never get past owning more than one property. And less than 1% of property investors own 5 or more properties (source: propertyupdate.com.au).

These stats suggest that many property investors sell their properties as soon as they see a tidy capital gain on the table. Why is this? Is it from a fear that the property won't continue to grow in value? Or is it that most people want instant gratification and want to bank their capital gain right now? Or is it because they have no grand plan and it's a case of live for today as tomorrow may never come?

The proven way to create (significant) wealth from property is to buy and hold. It really is the only way, unless you're a property developer or renovator, in which case you're running a business as opposed to investing.

Here's something I want you to remember... wealth is a measure of what you hold!

Of course there are times in our lives when we need to "cash in our chips" as we may need the money/cash for other things, or to put the money into other projects.

Selling is one strategy, but is it the most effective and only method?  If your property (or properties) are investment grade and you can afford to hold, selling is the wrong strategy - unless of course you can no longer afford to maintain the debt.

If you want and/or need to cash in on your capital gain, there is another strategy that will achieve the exact same outcome for you without having to part with your asset, without having to pay more tax than you should, and without giving away a perfectly good asset with a big future that is likely to compound (magnify) your wealth.

How to cash in on your capital gain without selling!

Debt recycling is a strategy used by sophisticated investors and it has created significant wealth for many!

One of the key benefits of property is that banks and lenders favour this asset type as solid collateral. Reason being is that property has a consistent and proven history as a safe asset to lend against. In some instances, banks and lenders will lend up to 95% of the value of the property. If they weren't comfortable with property as a security asset, and if they thought the value can fluctuate (like shares), they would lend at a much lower level (like shares - which is usually 70% maximum against blue chip shares).

A strategy that smart property investors use is debt recycling - which involves refinancing to release equity against the capital growth of the property. By refinancing you are effectively cashing out the capital growth (equity) which you can then use for other purposes. This strategy is more effective than selling as you end up with the cash, but without tipping the tax man and without giving away a perfectly good investment asset.

For example. Let's say I bought a property for $600k 5 years ago and I borrowed $480k (at 80% LVR).  And let's say the same property is now worth $800k (which is conservative growth if the property is investment grade).

Based on a current market value of $800k I can re-gear my loan to $640k (still at 80% LVR).  This now provides me with $160k of equity release (cash out) against my property.  And if I really wanted to, I could gear even higher at 90% (or more) which would take my gearing to $720k, in which case this would provide me with $240k of equity release (cash out) against my property.  Lenders Mortgage Insurance (LMI) applies if borrowing >80% however the LMI premium is added to my base loan which means the cost of LMI does not impact the amount of cash I receive in my hands.

The alternative is of course to sell the property for $800k. But note, after paying the real estate agent, marketing costs, capital gains tax, and the like, I am likely to be left with much less after clearing my original investment loan. Further, I have just given away all the future cash flows, and future capital gains, to someone else!

Why selling your property may be a mistake!

Here are some key reasons why I believe selling your property can be a mistake:

My motto is to never sell property unless of course it's the wrong property and capital growth is expected to be modest. If your property is investment grade and your borrowing capacity and affordability enables you to retain the property, then you should never sell.

My closing message is this... don't wait to buy real estate, buy real estate and wait!

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

The Block auctions 2023 - 5 key lessons!

Bidding at auction requires nerves of steel at times, let alone when 2.4million eyeballs are watching you bid on national TV.

The Block auctions were aired on national TV Sunday 5th November 2023. The results were mixed – ranging from a whopping $5m for Steph and Gian’s house (house number 4), compared to Leah and Ash’s house which passed in at $2.9m (house number 5).

The reserves were thereabouts – ranging from $2.97m for house numbers 1, 2 and 3 - to $3.35m for house number 4 (the winning house).

So, the question begs, why is it that Steph and Gian’s house (house number 4) achieved a record $5m against a reserve of $3.35m, compared to having ‘no sale’ for Leah and Ash’s house (house number 2) with a reserve of $2.97m?

The houses are all comparable in terms of land size, what they had to offer, location and position. The differences were marginal hence the slight variation in the reserves.

There are five key lessons which I believe we can take-away from The Block auctions of 2023 which may help you with your next property purchase at auction.

5 key take-away lessons…

1. Depth in buyers is everything

If there is no depth in buyer numbers, the property will struggle to sell.

Knowing this will help you with your game plan at auction as you don’t want to jump in too soon, to later find out that your only competition was you against the vendor reserve!

As we witnessed on The Block auctions, Adrian Portelli and Danny Wallis were the main (motivated) buyers. Once Adrian bought house numbers 1, 4, and 5, the other remaining houses struggled with house number 3 selling just a tad over reserve and house number 2 passing in!

2. The buyer with the deepest pockets wins

No matter how skilful you believe you are at auctions, the person with the most money wins.

Adrian Portelli (self-proclaimed billionaire) paid way over the top for Steph and Gian’s house at $5m (house number 4). The reserve was $3.35m which I believe is about right and is where intrinsic value is. Paying $5m was crazy and motivated by other factors!

Adrian had an ulterior motive which is why he made a $1million counter bid that secured him the property.

Adrian runs a subscription-based rewards company where he gives away (large) prizes to his subscribers. His buying motivation at The Block auctions was purely a marketing initiative for him.

Bidding on national TV, watched by 2.4million people, created an excellent opportunity for him to expose his business (LMCT Plus) which will inevitably increase his subscriber numbers in a significant way. The journos have gone to town writing about Adrian Portelli, who he is, what his business entails, and so on.

Adrian has also since gone to town announcing that the three Block houses he bought will be prize money for LMCT Plus subscribers and will be given away!

For you it’s important that you set your absolute walk-away purchase price so that you don’t get caught up in the hype of an auction and you don’t let emotions take you down a path you’ll later regret.

3. Be prepared

At times we see other Buyer’s Advocates at auction bidding on behalf of their clients, and calling their buyer client during the auction to see if they're prepared to stretch some more!

When we bid at auction for clients, our golden rule it to be prepared. Super prepared!

We ascertain before the auction the client’s maximum budget, then we ask them to dig even deeper to give us their absolute walk-away price to the last single dollar! Being prepared IS everything when it comes to auctions!

By being prepared, we don’t give anything away to the other bidders or to the auctioneer. And we certainly don’t get caught up in the emotion on the day – which is what the auctioneer will cleverly try to get you to do.

If I was bidding against another professional and I see they kept having to call their buyer, it would be quite obvious that they’re at their maximum and spreading themselves very thin. This of course helps me with my bidding game plan to ensure I win on behalf of my client using strategies to fight off anyone on their last dollar.

4. The reserve is merely an opinion on value

The true value of something is the price point where buyer meets seller, and/or the other way around.

The vendor reserve is usually a guide, largely influenced by the selling agent.

Of course, the selling agent recommends a price range quoted throughout the listing campaign. This is usually based on comparable sales – being a common method used widely across the industry.

When it’s all said and done, the property will be bought based on a price point which the motivated buyer is prepared to pay up to in order to meet their individual needs and wants. This may vary widely to the quoting range, or to the reserve. Adrian Portelli paying $5m for house number 4, against the reserve of $3.35m, is a case in point!

If someone has the means to pay over the odds, they stretch themselves to the last dollar to give themselves the very best chance to win the property. This number is usually in excess of the vendor reserve as evident by the run-away prices we regularly see in the major capital cities like Melbourne, Sydney, and Brisbane.

5. The auctioneer will be tenacious to squeeze every dollar

Real estate agents work for vendors and will be tenacious – and at times ruthless – in their quest to secure them the highest price.

At auction, emotions run high and the pace is fast. Keen buyers are playing against sophisticated tactics to drive up the price.

As you may have seen on The Block auctions, the auctioneer kept stalling "dropping the hammer" until he was convinced that there wasn’t another dollar left in the crowd.

Even when Adrian Portelli made his crazy $1m counter bid to claim Steph and Gian’s house for $5m, being $1.65m over reserve, the agent kept prowling until he knew there was no more petrol in anyone’s tank.

My final words...

As you can appreciate, bidding at auction to buy your home – or investment property – comes with a heightened level of emotions; fear, excitement, adrenaline, confidence, disappointment, and so on.

If you plan to represent yourself at auction, I recommend you attend as many auctions as possible (prior) to familiarise yourself with the process and to be well prepared.

If you feel that auctions aren’t for you, our master auction bidding services are designed to help you secure your desired property at a favourable price and on favourable terms. This also ensures you're not tripped up by the auctioneer in paying too much for the property, as we know when to keep pushing and when to bow out.

Good luck with your next auction and if we can be part of your next property move, please reach out as we are ready and willing to assist.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Buying property requires a strategic approach

Buying a home or investment property is likely to be your biggest financial decision, yet so many people are blinded by emotion when making a purchasing decision, usually resulting in paying too much, or worse, buying the wrong property. Let me explain!

In my daily work, we get approached by buyers frustrated from continually missing out on their desired property, as well as buyers not knowing how much they should pay for a particular property. There are also buyers not sure if the property of choice is the right one for them - whether that's a place to call home or an investment property to help secure their financial future.

Below are the top 5 common issues I see amongst buyers, along with my thoughts on what you can do to help increase your chance of success with your next property purchase.

Top 5 issues and what you can do about it:

1. Financial constraints

Many buyers struggle to find a property that fits within their budget. This is the most common issue that we see as usually emotions take over.

Being realistic is the best strategy here to ensure you purchase a property within your affordability and within your borrowing capacity.

When working out your absolute maximum walk-away price, ensure you stress test the loan amount you plan to borrow by adding at least 2% on top of the interest rate quoted by your mortgage broker - this way you're allowing a buffer for possible rate rises over the term of your home loan.

2. The property sells way above the quoted price range

The true value of a property is the price point where the buyer meets the seller - anything else is merely an opinion on price, which is also the case with the selling agent quoting range.

The best strategy here is for you to work out what the property is worth based on comparable properties that have sold and settled over the last three to six months. Also work out what the property is worth to you - of course this number is unique only to you based on your lifestyle and budget preferences.

When working out your absolute (best) walk away price, ask yourself... would I have paid another $500 to secure this property? If the answer is a resounding NO, then you know you've reached your limit with certainty!

3. The selling agent is creating hype saying there is strong demand for the property

Real estate agents work for vendors and will be tenacious - and at times ruthless - in their quest to secure them the highest price. Take what they say with a grain of salt and do your own research - it's the only way!

Go to the open for inspection and say very little. It's important that you have your "poker face" on and show little emotion - even if you love the property. This also applies if it's an investment property knowing that it ticks all the right boxes.

Definitely let the agent know that you're interested, and be sure to register your interest, however you should advise the agent that you're also considering other options and to please keep you posted.

If asked to make an offer prior to auction, you're best to sit back and wait for auction day as transparency at an auction is usually best - this ensures you don't get fooled into buying a property with phantom competition.

Being transparent with the selling agent about your interest is a good idea to ensure that the property is not sold from under your nose, and if it is going to sell prior to auction, that you get the chance to throw your hat in the ring.

4. Market conditions

Low stock is a very common issue for buyers - like right now - where stock levels for quality family homes are very low as buyer demand is outweighing supply. At least this is the case in Melbourne and surrounds.

The best strategy here is to build a relationship with prominent agents in your desired location and that you keep in regular contact with these prominent agents to ensure they tip you into opportunities as they arise, as well as possibly provide you access to the hidden market (i.e. off-market properties).

5. Negotiation and Competition

Buying a home or investment property is likely to be your biggest financial commitment and as such emotions run high.

Unless you work in property, there's likely to going to be a significant knowledge gap.

Choosing the right property is one thing. Knowing what the property is worth and beating your competition is another!

Due diligence is mission critical here to ensure that the property of choice doesn't end up costing you a bomb down the track with significant repairs. It's also important you do your due diligence to ensure you pay what the property is worth - or what the property is worth to you at most!

We see this all the time where competition drives buyers hard, particularly at auctions where emotions run high and the pace is fast, with keen buyers playing against sophisticated tactics to drive up the price.

If you plan to bid at auction, be sure to attend to as many auctions as you can to familiarise yourself with the process and what is likely to happen when it's your turn.

In summary...

As you can see, buying a property is more than just a few clicks on realestate.com, turning up to an open house, and signing an offer. Buying property requires a strategic approach to ensure that you not only buy the right property, but to also but it at the right price.

If you want to buy your next property lead by strategy and with ultimate success, please get in touch with us today for a no obligation discovery call to find out why we're your secret weapon when it comes to your next property move.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

5 rules Monopoly can teach us to win as a Property Investor

Monopoly has been a classic board game for over a century.  It's a real estate trading game played for fun... and for a chance to be a real estate tycoon. The game rules are interesting as there are some valuable lessons all investors can learn to win at the game of property investing.

I've played Monopoly at least a hundred times, since I was a kid.  As much as the game annoys me with the fact that I can't borrow to buy property, I'm still hooked on the thrill of accumulating real estate and collecting rents. These days I get the same thrill from playing the property game in real life. It's fun..!!

In my daily work, I see some common mistakes people make when it comes to property investing. Given that most people have played Monopoly at least once in their life, I thought it made sense to use some of the key principles from the game to real life property investing.

Here are the 5 key rules from Monopoly that (I think) correlate to property investing today:

1. Positioning

Those who win at Monopoly usually own properties with the highest probability of other players landing on them, which entitles the property owner to collect rent.  For example, the statistics say that 7 is the most common number rolled with two dice, and the 'just visiting jail' is a common space landed on.  Therefore owning the Orange sites is a smart move seeing they are located 6 and 9 spaces from the 'just visiting jail' landing.

The similarity:

When investing in property it's not just about buying in the right suburb, but also about buying the right position where the property sits. If you buy a property in the right street, on the right side of the road, with the right floor plan, and next to other high performing properties, the property will be in constant demand by buyers and by tenants, no matter what the market is doing.

2. Cash is King

In the game of Monopoly cash is king. To win the game, you have to be the last player standing. In other words, the last player to have money wins. If you are moving around the board buying up everything, when it comes to paying out other players for landing on their sites, and you run out of cash, you lose.

The similarity:

Property investing is just like any other business, where cash flow is king. Maintaining a cash (financial) buffer is fundamental to ensure you can ride the ups and downs that comes with property investing. For example, interest rates can move up all of a sudden (like now) resulting in higher home loan repayments, or a property will require repairs and maintenance from time to time.  Having the cash readily available is important in order to remain in the game.

3. Be patient

To win at Monopoly you have to be patient and have a game plan. Buying every piece of real estate you land on is not strategic and will likely cost you the game as you will run out of money.

The similarity:

The world's most successful investor of our time, Warren Buffet, once said "wealth is the transfer from the impatient to the patient".  This is so relevant when it comes to wealth through property. Buying the right properties and being patient (holding) is the secret to creating wealth through property investing. I see too many people trying to time the market. To make serious money from property investing, it's about 'time' in the market and not 'timing the market'.

4. Diversify

To increase your chance of winning at Monopoly, you need to spread yourself throughout the board as opposed to owning just the one property and loading it up with hotels.

The similarity:

If you bet everything on one property type in the one location (e.g. apartments in the same suburb), you become single point sensitive when the market changes appetite. This is happening right now with apartments in Melbourne, Sydney and Brisbane, where an over supply of apartments has impacted the capital growth of such properties (at least for the short to medium term until demand meets supply once again!).

5. Cash flow

Monopoly is a simple game. You start off with some money, and your goal is to be the last player standing with money. The way you win in Monopoly is by collecting rents on property, or cash flow. On the Monopoly board, the best cash flow are the four railroads, because if you own all four of them, you collect $200 in rent (...a 25% return).

The similarity:

Capital growth is a key fundamental in order to create wealth through property investing - no arguments about that.  However, if you don't manage your cash flow to ensure you remain in the game, then you'll be forced to sell up your property asset/s and deny yourself the chance to create real wealth from holding your properties for the long term.

In summary...

Monopoly shouldn't be taken as gospel, as the rules certainly have their flaws. The fact that you can't gear and borrow money is a real flaw in my opinion. In real life, if you don't take on good debt, you'll never achieve true financial freedom.

Having said that, Monopoly does have some valuable lessons to teach us. Buy well positioned properties, maintain a financial buffer, be patient, diversify property types, and manage your cash flow. These are all very important fundamentals to ensure you win as a property investor.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.