REVOLVING doors and real estate should never mix. If you’re going to walk into the world of property as an investor or an owner-occupier, you have to be prepared to stick around.
Otherwise, the high transaction costs – particularly that mongrel of a thing called stamp duty – can turn a good investment decision into a dizzying, loss-making failure.
The best gains in property come to the patient: those people who invest for at least five to 10 years, preferably longer. If it’s less than five years, it’s just speculation.
However, even if you plan to hold a property for decades, you still need to think about how you will eventually say goodbye.
You don’t have to write down an exit plan but thinking about it will help you decide the best way to structure ownership of the property.
For example, a common strategy in the past has been for the high-income earner of a couple to put an investment property in their name to get tax benefits from negative gearing in the early years.
That may work for some couples but what if the property is held for many years?
Then the negative gearing becomes positive gearing and the higher-income earner pays more tax on the rental income. Plus they suffer from a crunching capital gains tax bill at the eventual sale because the property’s ownership is not split with their lower-income spouse.
Another example is self-managed superannuation: a hot topic among property investors lately who have shunned shares and pumped their nest egg savings into real estate.
Putting a residential investment property into a self-managed super fund can work wonderfully well if you sell it after retiring because you pay zero CGT. However, you can run into problems if you’re going to rely on it for income and your tenant moves out.
The property may no longer be able to pay you the retirement income it is supposed to and you can’t just sell off the bathroom.
There are many other scenarios where failure to have an exit plan can cost you dearly. Investors and owners always need to consider tax, stamp duties, their investment time-frame and their future needs.
Of course, plans can always change but it won’t be so detrimental if you know the consequences well in advance.
And beware of real estate revolving doors. Those things can spit you out quickly and painfully if you’re not careful.
Anthony Keane is editor of Your Money.
WHAT CAN IMPACT ON YOUR EXIT PLAN
Property market booms and busts
Changes in tax laws or income tax rates
Interest rate rises and falls
Centrelink pension income and assets tests