Avoid trap of selling at a loss

THERE’S something about owning a home that makes us want to hold on to the place. But that loyalty doesn’t always apply with investors, and that could explain why one in 10 landlords have lost money on recent property sales.

The latest Pain and Gain report from CoreLogic shows who made money on bricks and mortar in the June quarter of 2018 — and who copped a loss. It’s interesting reading because it certainly dispels the myth that “you never lose money on property”.

Close to nine out of 10 residential properties that were resold in the June quarter made money for their owners, though investors were more likely than owneroccupiers to sell a place for less than they paid. Of course there can be a whole variety of reasons for this, but I suspect many people go into property investment wearing rose-tinted glasses.

Buying a rental property means handing over a solid chunk of your capital in upfront costs. Stamp duty is a real culprit here. Then when you go to sell, you get hit with a second round of expenses for legal fees and the agent’s selling commission.

Your property needs to rise in value by at least the total of those transaction costs just to break even. And in today’s weaker market, that doesn’t always happen.

According to CoreLogic, loss-making resales are up across all capital cities compared with last year. In some mining regions as many as 40 per cent of homes are being sold at a loss.

What is interesting is that houses are consistently more likely than apartments to turn a profit on sale. Part of this is because houses have a component of land value. In addition, the unit market can be more prone to an oversupply. Either way, CoreLogic says units in Melbourne are nine times more likely to sell at a loss than houses, and 12 times more likely in Canberra.

If you’re a homeowner, it’s easy to ride out market highs and lows as long as you’re happy to stay put for a while. For investors, it’s true that losses on the sale of a property can potentially be used to offset taxable gains on other assets. But no one makes money by continually selling at a loss.

Bottom line is, buy well and be prepared to invest for the long term. Over the June 2018 quarter, houses resold at a loss had typically been owned for just six years, while those resold at a profit had been held for nine years. — Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.