Nest Egg: Is it time to consider selling your investment property?
When we review clients’ financial assets & liabilities there is often an investment property in there. Quite often they will ask for our opinion as to whether they should hold on to investment properties they’ve owned for a number of years or sell them to reduce debt or take our equity.
Of course, we know that many Irish people have a huge love of owning property and investing in ‘bricks and mortar’. However, I always urge people to look dispassionately at the property they own, or are thinking of buying and treat it like any other asset that they would invest in. I have a checklist of headings that I tell people they should consider before buying that investment property.
Tax-efficiency. Rental income from a personally held property is fully taxable at an individual’s marginal rate.
This means that any rental income received from your tenant will be added to your other taxable income such as salary and bonuses.
You can reduce your personal tax liability each year by making a personal pension contribution within the age-related limits, but you cannot reduce the tax you pay on your rental income received as this is not deemed Net Relevant Earnings.
This effectively halves the yield on your investment property and does not make it a tax efficient investment.
Cost of entry/exit. From my experience, many purchasers of investment properties do not adequately add up the true cost of buying a second property.
There is quite a high cost of entry as a percentage of the total transaction cost when buying which includes legal fees, stamp duty, surveyor’s report, insurance, property tax, land registry fees etc.
This can add a lot to the purchases price when compared to investing in non-property assets. Remember, when you are selling the property that you will also incur some of these costs too.
Liquidity. Don’t under-estimate the benefits of liquidity when you own any asset that you hope will appreciate in value over time. Liquidity simply means that you can sell it and turn it into cash whenever you want at short notice. Obviously, property does not fall into this category and from 2008 onwards for a good number of years, it simply was not possible to sell property even if you wanted to.
The issue with an illiquid asset like property is not necessarily the price might be falling when it suits you to sell, sometimes there simply is no price if there is no buyer for it. This caught many people out who wanted to retire during our property crash from 2008 onwards.
Another important point is to try not to overpay for a property if your mind is already made up and you are going to purchase. Just like any other asset that you want to someday sell higher than the price you paid for it plus costs, do some research as to what that property has been sold for pre & post the property crisis of 2008/09.
On a separate note. In my article two weeks ago, I incorrectly stated that qualification for the State pension here in Ireland was moving to age 67 from 2021, i.e., anyone born after 1955 will have to wait until they are 67 years old to claim their pension.
The current qualification age for all State pensions is still 66. There was a planned increase to 67 from 2021 and 68 from 2028 but Budget 2021 stated that 66 would remain the qualifying age. I hope my inaccuracy in the article did not cause any readers’ unnecessary distress