Hi all, had a spare 20mins, so thought I’d try a little exercise in selling out of an overpriced property to get back in cheaper, as I've seen it mentioned a few times over the last few months.
Assumptions: 75% debt on original purchase price + costs (so about 80% LVR), tax bracket of 30%, the house is neutrally geared upon sale so requires no ongoing funds.
$200k property purchase + $12k costs = $210k ($170k debt)
Value increased to $300k
Expecting a drop of 30% so sell to get back in later
Costs to buy = $10k
Costs to sell = $6.5k
CGT = $12.5k
Total exit costs = $29k
Cash left after IO debt of $170k repaid = $101k
Assume that it takes market 2yrs to drop 30%, and in the mean time you are earning 15% on your money ie. in shares, funds etc.
= $101k funds left after sale
$101k + 15%pa x 2 (no extra contributed)
= $133k
Sell after 2yrs
Value increase of $32k
Entry & Exit costs of 1% (conservative) = $2.3k
CGT on sale = $4.5k (assume CGT disc. Applies to entire cap gain)
= $126.2k cash left
Costs to re-enter property at $210k (30% decline) + $13k costs
= $223k
Borrow 75% + costs again (so 80% total LVR)= $178k debt funding
= cash needed of $45k
= $126.2k (cash) - $45k cash required
= $81.2k left over cash.
End result = same property owned with hopefully higher yield, and $81.2k cash left over.
Following assumptions were made:
- The biggest assumption is that the property will in fact drop 30% - if it does'nt, you would have been better off leaving your deposit funds in a neutrally geared but higher leveraged environment.
- A 30% drop in comparable properties over the space of 2yrs, ie. no further increases after sale, but immediately started declining (if it went up another 10% after you sold, then dropped 30% - the figures would'nt’t look as good). In other words, you have to pick the peak of the market.
- Assuming prices go down for the whole 2yrs – if they only take a year to drop then start rising again, you won’t have made as much cash in the other investment, or may miss buying altogether. In other words you have to pick the bottom of the market, and have to have it in the time frame that suits you.
- Assuming you can achieve 15% return over the 2yr period with your cash.
- This assumes neither investment – house or shares require any ongoing commitment. Yes you can leverage the shares/funds but that will increase your risk, and also remember the house was neutrally geared – so would'nt be comparing apples with apples, as you would have to be making interest payments on the margin loan requiring you to either capitalize or draw from your own income.
- Assuming you are only on a tax bracket of 30% - otherwise figures look worse with more CGT taken out
- Assume 100% of profit from funds/shares is tax deductible (unlikely unless you make all the profit in the first year and none in the second otherwise CGT discount won’t apply for total profit)
Now I’m sure there are some factors I’ve forgotten, but this is just off the top of my head.
The above proves it can be done, but taking into account all the assumptions that need to be made, I don’t believe I would ever have enough faith in my timing and judgment of the market to pull of the above exercise. Good luck to those who do.
As a matter of interest - how many people here would be willing to give this a try?
Assumptions: 75% debt on original purchase price + costs (so about 80% LVR), tax bracket of 30%, the house is neutrally geared upon sale so requires no ongoing funds.
$200k property purchase + $12k costs = $210k ($170k debt)
Value increased to $300k
Expecting a drop of 30% so sell to get back in later
Costs to buy = $10k
Costs to sell = $6.5k
CGT = $12.5k
Total exit costs = $29k
Cash left after IO debt of $170k repaid = $101k
Assume that it takes market 2yrs to drop 30%, and in the mean time you are earning 15% on your money ie. in shares, funds etc.
= $101k funds left after sale
$101k + 15%pa x 2 (no extra contributed)
= $133k
Sell after 2yrs
Value increase of $32k
Entry & Exit costs of 1% (conservative) = $2.3k
CGT on sale = $4.5k (assume CGT disc. Applies to entire cap gain)
= $126.2k cash left
Costs to re-enter property at $210k (30% decline) + $13k costs
= $223k
Borrow 75% + costs again (so 80% total LVR)= $178k debt funding
= cash needed of $45k
= $126.2k (cash) - $45k cash required
= $81.2k left over cash.
End result = same property owned with hopefully higher yield, and $81.2k cash left over.
Following assumptions were made:
- The biggest assumption is that the property will in fact drop 30% - if it does'nt, you would have been better off leaving your deposit funds in a neutrally geared but higher leveraged environment.
- A 30% drop in comparable properties over the space of 2yrs, ie. no further increases after sale, but immediately started declining (if it went up another 10% after you sold, then dropped 30% - the figures would'nt’t look as good). In other words, you have to pick the peak of the market.
- Assuming prices go down for the whole 2yrs – if they only take a year to drop then start rising again, you won’t have made as much cash in the other investment, or may miss buying altogether. In other words you have to pick the bottom of the market, and have to have it in the time frame that suits you.
- Assuming you can achieve 15% return over the 2yr period with your cash.
- This assumes neither investment – house or shares require any ongoing commitment. Yes you can leverage the shares/funds but that will increase your risk, and also remember the house was neutrally geared – so would'nt be comparing apples with apples, as you would have to be making interest payments on the margin loan requiring you to either capitalize or draw from your own income.
- Assuming you are only on a tax bracket of 30% - otherwise figures look worse with more CGT taken out
- Assume 100% of profit from funds/shares is tax deductible (unlikely unless you make all the profit in the first year and none in the second otherwise CGT discount won’t apply for total profit)
Now I’m sure there are some factors I’ve forgotten, but this is just off the top of my head.
The above proves it can be done, but taking into account all the assumptions that need to be made, I don’t believe I would ever have enough faith in my timing and judgment of the market to pull of the above exercise. Good luck to those who do.
As a matter of interest - how many people here would be willing to give this a try?
