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:

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.

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, 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.