Chris Gray’s investment strategy is simple: never sell real estate.
Just in case you haven’t heard it like I’ve said it a million times before, my real estate investment strategy is simple … never sell a property.
BUY AND KEEP.
Let me make this as clear as possible:
Buy – if you can
Hold on as long as you can
There are many reasons to stay long, but there are great …
Capital gains tax.
What is capital gains?
Capital gain (in very simple terms) is the amount of money that an asset has increased in value from its acquisition to its sale.
For example, if you bought a Bondi apartment in 2001 for $ 500,000 and sold it in 2021 for $ 1.5 million, the capital gain would be $ 1 million.
Purchase price: $ 500,000
Sales price: $ 1,500,000
Profit (capital gain): $ 1,000,000
What is a capital gains tax?
Capital gains tax (CGT) is a tax introduced in Australia in 1985 and is levied on the sale of assets (unless specifically exempted) acquired since then.
Investment real estate is classified as an asset, so if you are selling investment real estate (there are different rules for your main residence, so always be sure to consult with your accountant), ATO will come and sniff to find a big piece of the pie.
Using the example above, you can expect the ATA to knock on your door asking you to pay the tax in part or in full with $ 1,000,000.
Here things get complicated and you need to have the help of an accountant. There are many different rules that apply to selling real estate to individuals, super, companies, trusts, foreign residents and how long you have actually owned (or lived in) an asset.
One thing is for sure … it won’t be nice.
Like NEVER pay CGT
Simple. Think outside the box. CGT is a tax on sales assets.
So if you never sell, you will never have to pay CGT.
“But Chris,” I hear you say. “How can I make money on property if I never sell or make a profit?”
Using the example above, if you originally took out a loan at 100 percent of the cost of buying a Bondi apartment for $ 500,000 and kept the loan with only interest, over the years your loan will still be $ 500,000.
The difference now is that the property is worth $ 1.5 million, so you set up $ 1 million in equity.
Banks (and other lenders) recognize this, so they may be ready lend you extra money for that capital. Again, talk to your accountant and mortgage broker, as all circumstances are different.
Is there a time when the finance provider will not issue equity?
Service is about serious problem with refinancing these days and that’s what real estate investing has turned into. That’s at least 90 percent of the game in getting money from the bank for what they continue to do create your portfolio or access to capital to live.
One of the alternative strategies to consider is to get banks to release real estate without debt.
- Let’s say you had $ 5 x $ 1 million for 80 percent of the funding, i.e. $ 4 million in debt.
- Over time, these properties double to $ 2 million each x 5 = $ 10 million, so now you’re only targeting 40 percent.
- In an ideal world, you refinance up to 80 percent and have $ 4 million in your account – $ 10 million x 80% = $ 8 million minus the $ 4 million you already borrowed = $ 4 million.
However, if you do not have the ability to service $ 8 million, they will not give you credit.
If you sell one of these properties for $ 2 million, the bank may require you to pay an initial mortgage of $ 800,000. This means that you only get $ 1.2 million in net sales profit after tax of $ 250,000 ($ 1 million in capital gains less 50% off CGT x 50% tax). So you only get $ 950,000.
There is an argument to say that the bank requires only $ 5 million for your initial loan of $ 4 million, not a current value of $ 10 million. So there is a chance that they will release $ 5 million of property without debt and return you ownership.
They probably won’t do that if you say you’re going to sell the property. since it will reduce the revenue you use to service the $ 4 million debt. But if you say you’re doing it for asset protection / diversification reasons, it may give you a better chance.
So you have an initial $ 5 million property in the bank and your 80 percent loan is $ 4 million.
Later you can choose to refinance too or sell.
With that $ 5 million of debt-free real estate you can apply to a Level 3 or Level 4 lender and get a 10, 20 or 30 percent paperless loan at very reasonable rates. This is because the risk for a new lender is very low.
If this is still not possible due to usability restrictions, yes, you can sell the property.
But this time you will get a total revenue of $ 2 million because these properties have no debts.
You still pay $ 250,000 CGT, but now you get $ 1.75 million in cash instead of $ 950,000.
One of my friends has done this several times and now I am going through the process. I still don’t intend to sell one unless I really have to, but at least it will give me flexibility in the future.
As always, check your strategy with a mortgage broker, accountant and / or financial planner before taking any action.