Are you an accidental investor?

By Philippe Brach

A client I met with recently had a conundrum.

A single man in his 40s, he had met a wonderful woman in the last year. He owned his home in Sydney which he’d had for more than a decade, while his partner also owned her own place. They were growing weary of ferrying their belongings back and forth, and made the decision to move in together.

My client said: “We’ve moved into her home, and now I don’t know what to do with my property. Sydney has boomed so I’ve had some decent growth, meaning this could be a great time to sell. But it might be a smart move to keep as an investment property. I know the place will rent and it is in a great location. Why not keep it and make it my first investment property?”

Becoming an accidental investor

Obviously my client is not the first person to find himself in this situation, and he won’t be the last.

When two individuals who both own property decide to move in to one dwelling and keep the other as an investment to rent out they become ‘accidental investors’. The second property was originally purchased as an owner-occupier home but has now become a rental by default.

The decision to sell or keep as an investment property is ultimately dictated by the numbers, in particular the answer to the question: What is my cash flow going to be while I hold the property? This is very important as it will affect the investor’s finances for a long time. The answer lies in the relationship between rent collected, mortgage repayments, salary and depreciation entitlements, among others. If the mortgage on the property is, say, $800,000, the rent is $500 per week, and it is 40 years old (i.e. little or no depreciation), the resulting cash flow is going to be substantially negative. If this negative number is too much for the investor, then selling the property seems to be the best option. If the cash flow numbers look good, then it may be an option to keep it.

When making big financial decisions about selling or holding your real estate assets, you should think about the following:

  • Your personal situation: Is it the right time for you to invest in property (i.e. turn your home into an investment)? Consider your job security, other financial commitments, etc.
  • Property condition: What age is the property? Will it attract a tenant in its current condition, or does it need refurbishment to bring it up to a desirable rental standard? What other rentals are in the area and how would the property compare?
  • Finances: If refurbishment is necessary, what is the cost to bring the property up to scratch and how long will it have to remain vacant while upgrading? This will impact cash flow.
  • Upgrades: You can end up in a world of financial and legal pain if you have previously made any home improvements that were not submitted to council for approval or that do not strictly adhere to council regulations and a tenant has an accident. You may consider your improvements to be minor additions or changes but they will need to conform to local regulations.

It can be tough deciding which course of action to take, which is why I suggest you don’t rush it. It might be a good idea to consider a trial rental period (assuming you don’t have to spend too much on making the property 'renter-ready').

Holding on to a well-performing property can make a lot of financial sense, especially when you consider how much it costs to sell (advertising costs, real estate commission) and to buy again (stamp duty, solicitor’s fees). On the other hand, if you sell your own home you won’t have to pay any capital gains tax.

There are advantages and disadvantages on both sides, so if this is a decision you’re grappling with I’d strongly suggest you consider discussing your situation with a financial planner and/or accountant.

Of course, I would also be more than happy to discuss your long-term property plans, to help you work out whether selling or holding on to your property makes the most financial sense in the context of your wealth-creation goals.