Risks of Selling in a Hot Real Estate Market and Buying the Dip
“I am not convinced that we will see a drop in prices”
Margaret Lomas, founder of Destiny Financial Solutions, says the decision to sell depends on the location of the property and the investor’s overall exit strategy.
“If you’re close to retirement or if the exit point you had planned for the portfolio isn’t there yet, I think the risk of selling now and buying back is high,” she says.
“I’m not convinced we’ll see a price drop – more of a correction, which won’t be as large as the buying and selling costs you’re likely to incur.
“Secondly, a correction is unlikely in all markets, so you risk selling a property that still has a lot of upside potential – like those in Perth, Brisbane and Adelaide, all of which still show signs of ramping up.
“None of these cities have reached an unsustainable peak yet, which means that even if prices are falling, they are more likely to simply stagnate rather than fall.”
Lomas says that for investors who still have many years on their investment calendar and who own property in hot spots, there could be an argument to sell and buy back.
“It’s very rare that it’s better to do that,” she warns. “Unless you have a really failed property that has no chance of improving, keep your cool and don’t be tempted to flip properties, thinking you can make an overall gain. It rarely works that way. . »
Doron Peleg, founder and managing director of BuyersBuyers, says investors should re-examine their investment strategy and what they plan to buy instead.
“If you have a long term investment strategy and own a high quality property that is enjoying high demand in a high demand area, in most cases it is best to own the property – at unless there is a known issue with the asset in question,” he says.
“On the other hand, if you have a low-quality property (like a small unit in a high-rise tower located on a main road in a low-traffic neighborhood), you might consider selling and buying a family-friendly property in a popular area instead.”
Lomas says the main risk of selling now and buying later is the high cost of real estate transactions.
“With costs to buy above 5% and costs to sell around 3%, simple math tells us that total transaction costs are 8%, not including capital gains tax (CGT So you would need to make a considerably bigger payoff to make the trouble you put yourself in and the risk you put yourself in worth,” she says.
“A gain of, say, $200,000 on an investment property can expose the seller to a CGT bill of $30,000 to $45,000. Total selling costs, then stamp duty and transfer fees on redemption, could easily exceed $100,000, a shortfall that would be difficult to fill even if real estate prices fell 20%.
Tax expert Adrian Raftery agrees that transaction costs make trying to time the market risky.
“You could easily rack up $200,000 in those sunk costs,” he adds. “It’s a big gamble trying to pick the top of the market.” He points to the risk that prices will not fall in some areas, as “Australians will most likely hold property rather than sell into a declining market and wait for it to rebound in the future”.
Investors also risk being overpriced when they try to buy later, says Peter Koulizos, program director, property master, at the University of Adelaide.
“It doesn’t make sense to buy later because I don’t think house prices will go down,” he says. “If the market doesn’t go down, you may not be able to afford to buy back. Also, interest rates will be higher, which will also decrease your ability to borrow.”
Domenic Nesci, co-founder of Wealthi, a Sydney buyers’ agency, says investors who sell now could risk missing out on further strong price growth.
“We believe that for investment properties, the best is yet to come. With the borders reopening, we are likely to see big increases in rents and yields. »
One of the biggest problems with selling a good asset is that you then have to find another one, says Nesci.
“When the market works as well as it did, everyone looks like a guru. This can set some people up for failure because they have made a lot of money with little or no effort, making them overconfident in their ability to make sound investment decisions,” he says.
“We will be entering a more normalized market where a lot more skill will be needed to predict strong capital and rental growth.
“So people can sell their great asset in favor of selecting a more speculative property and get stuck in a property that may not move or just lose value.”
Nesci suggests using the equity in the existing property to buy back rather than sell.
Questions to ask before selling
- Has the property run its course and maximized its ability to continue to grow in value?
- What will I buy next and how long will I be out of the market?
- What are my exit fees? These include CGT, loan break fees, agent fees, and marketing fees.
- What are my entry fees? These include stamp duty, loan origination fees, time to buy back another large asset and upgrade it, and buyer’s agent fees.