Cashing Out – Should I Sell My Investment Property?
For many people, the attraction of a cashflow generating investment is the steady stream of revenue it produces. There’s nothing quite like an effortless deposit into your bank account each month. Of course, it’s a powerful motivator and one not to be disputed.
However, when the investment is in Australian residential property, the real money to be made is in the long-term capital gain. The trouble is, capital gain is often viewed as simply a ‘paper gain’ and does not replenish the investor’s bank account each month.
The reward for discipline
Investing for a long term capital gain takes skill and discipline, and the belief that your asset will, in fact, appreciate in value considerably more than the monthly net rental income it produces. Therefore, to have confidence in the property market and to justify the necessary discipline to hold on to your asset, you need to know that the market will, in fact, increase in value over time. It also means knowing what type of property to invest in and the best locality to choose to ensure a profitable, long term capital gain.
Apartments versus house & land
Let’s look at Melbourne, for example. A popular property investment category in Melbourne has always been inner city non-landed apartments and some units. But since the beginning of the pandemic, this market has been starved of tenants (no students, no AirBnB, no international arrivals) and has subsequently crashed in value, with very high vacancy rates, plummeting rents, lowering bank valuations and falling resale values. In difficult times, to sell an inner-urban apartment property is simply to take a big loss – even if a buyer can be found, which is by no means assured.
On the other hand, the pandemic has created an increasing demand for housing where there is open space, freedom for kids to play, and ease of working from home. Such housing is typically in the middle and outer suburbs.
The evidence is in the statistics
Here, housing prices have not only resisted predictions of a ‘crash’ they have in fact increased beyond all expectations. Look at landed suburban properties over the past quarter and year. The last quarter on quarter (QoQ) increase for Melbourne was 5.3%, higher than any other capital city, even though its yearly growth was slightly inhibited due to Melbourne’s extended lockdown. Such price increases are fuelled by high demand and limited supply. Reinforcing this, auction clearance rates have been as high as 90% throughout Australia, a rate rarely seen even before the pandemic of 2020.
Double your capital value
Long term, investment properties in residential areas of Melbourne, purchased early in the lifecycle, when communities are new and yet to become fully settled, have seen values double over 10 years. Yes, double! So, a $450K property purchased pre-pandemic could be worth $900K by 2029. That’s $450K in actual real profit that the investor has earned by simply having the discipline and foresight to buy at the right time, at the right location and at the right price. Compare $450K capital gain to the net rental cashflow over the same period. Which strategy would make you rich?
So, before you let immediate financial pressures or concerns about the future post-Covid world cause you to think of selling your house & land investment property, consider the real wealth that its ‘paper profit’ is bringing you.