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.