Selling your home in Sydney and using the equity to invest in property in a high growth area will result in an increase of potentially millions in net wealth over eight years if you structure your finances correctly.
With the three-year forecast for Sydney property values being a decline of around 4 per cent – according to the traditionally conservative BIS Oxford Economics – holding property in Sydney will almost certainly cost you dearly.
In fact, over the six months to March 2018, many suburbs on the Northern Beaches and in greater Sydney have already declined in value by 5 per cent or more.
While that decline is unlikely to continue, the market is likely to be very flat for the next five to eight years.
We shouldn’t be surprised about this. It’s quite a normal part of the property cycle. Most markets boom for five to eight years and then plateau for five to eight years. See Sydney’s historical chart above.
In contrast to this, forecasts for certain suburbs in Southeast Queensland, Newcastle and Canberra show strong growth expectations of around 85 per cent over the next eight years. See the chart below.
For those who want to retire early, selling your Sydney home or apartment and buying an investment property in one of these high growth suburbs could make you millions more than retaining your Sydney home.
Example on a $1 million home:
Let’s say you’re a Sydney-sider who bought a $500k property to live in eight years ago with a $100k deposit. That property is probably worth close to $1 million today.
You’ve probably paid that loan down from $400k to $300k, so you have $700k equity.
In selling that home, there is no capital gains tax as it’s owner occupied, so your only fees are about $20k (2 per cent) in real estate commissions and $3k in legal fees times two for selling and buying.
Your stamp duty on buying $1 million of property in an area such as SE Queensland is $41k, so your total changeover costs are $64k. Now you can start earning money through capital gains – the forecast is approximately 8 per cent per annum, compounded.
With $80k capital gains in the first year, you’ve already made a profit on your investment. And in eight years you’ve made $850,000 in capital gains ($789,000 in profit after changeover costs). Is that worth moving house for?
If you compare this person’s current cash flow to the renting and investing alternative they would be better off in cash flow as well, plus they could also keep any extra repayments they had made in the past as a cash reserve buffer to help manage any other potential changes in cash flow or interest rates.
The current home loan of $300,000 at 4 per cent principal and interest would be costing about $1,910 per month, or $440 per week, but if you add the council rates ($1,300), water rates ($1,200), insurance ($1,200) and maintenance($4,000) of about $7,700 pa, the total weekly cost is then close to $590 per week.
By comparison, renting an equivalent property in Sydney would cost about $650 per week, however the $1,000 investment in a well selected area with the same loan as above plus the changeover costs of $64K, after the higher rent of about $900 per week, plus tax benefits would be positive in cash flow by about $270 per week, even when allowing for the same costs as the Sydney home, plus agent management fees and an average allowance for vacancy of 2%. So you are only out of pocket by about $650 less $270 = $380 per week!
This means that the renting and investing option is better than the keep Sydney option in cash flow by about $210 per week, which could be used to help pay down the loan even quicker, invest in another property, or rent a better property, all while having a very high chance of achieving substantially more capital growth.
What is the value?
While of course, it is a big decision to sell your home, consider this: if someone paid you hundreds of thousands of dollars to rent the same property or a better property as you currently own, would you do it?
And also consider that with your $700,000 equity you could safely purchase two $1 million investment properties – doubling your capital gains to well over one million dollars. And as the equity and cash flow grows in those properties grow, you can safely purchase more property, effectively building a multi-million dollar property portfolio in only eight years, with equity probably more than $2 million greater than if you just keep your Sydney property!
The extra cash flow and growth could even help you justify renting a more expensive property in Sydney, plus you would almost certainly be able to buy back into Sydney in about eight years with your much higher profit.
Or, if you started with a $2 million property instead of a $1 million property, the returns may well be double the above, so you could end up being more than $4 million ahead in just eight years! Imagine how much that could change your life?
And if selling your home and renting is just too much to comprehend, then you may well be able to keep your home, while investing in the next growth market?
Of course there are risks and many other issues to understand and consider carefully before making any such decisions, so if you need some education or advice to further understand this concept or any other property investment issues, please come in for a free 60 min consultation to learn more.
Considerations for Sydney investors:
While the example above is for people who own property in Sydney, the case is similar for those who have investment properties here.
With Sydney’s terrible yields and poor capital growth outlook, moving your investment to a high growth area is highly likely to be a very profitable decision.
Important Note and Warning: This information is general in nature and should not be considered personal tax advice. We highly recommend you discuss these concepts with your accountant, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.