To sell or not to sell… that is the question. You could imagine one asking such a question with a face similar to the emoji on the bottom.
Recently, I’ve been asked by a few of my clients regarding whether they should sell their property right now. Unless it’s for personal reasons, my answer has always been no. So at the request of one of my clients, I’ll go deeper into this topic in this week’s Insight Article so that I can shed some light on why selling doesn’t make any sense.
If you’re reading this and would like me to do a deep dive on this controversial topic with you, please send me an email at Zhen@PrimePropertiesTO.com.
One for One – When pondering the dilemma of “to sell or not to sell”, I would actually challenge your question with another question:
“Is your property generating positive monthly cash flow?”
The above question applies to both selling an existing property and a pre-construction assignment. Before I tell you my thoughts, allow me briefly explain what an assignment is and the purpose of it.
Where’s the Assignment Clause? An assignment is essentially the process in which one person sells the benefits and obligations of a contract to someone else. In the case of a pre-construction contract, the new buyer (the “assignee”) gets to close on the condo unit which you (the “assignor”) purchased much earlier from the developer. Technically, the purpose of an assignment is for a “just in case of an emergency” situation and you should treat it as such.
I know many may disagree with me on this and some investors even actively treat the assignment clause as a mandatory necessity when purchasing a pre-construction condo because they know they will want to sell it before closing.
Think Twice – Allow me to explain why I don’t recommend selling any piece of real estate right now, and that includes both existing and assignment properties.
In my honest opinion, you will make the most money when you buy and hold a property, especially with the way the Toronto real estate market is trending. The longer you hold onto a property, the better off you will be. The combination of cash flow, mortgage paydown and a very conservative appreciation will generally yield you over 25% return on your money (i.e., your mortgage down payment). This is significantly better than any mutual fund!
I have many clients who ask me to sell their properties, and as much as that will help benefit my business, I often talk them out of the sale of their property because I don’t want them to lose an income producing asset. Income producing assets are super important to your wealth generation because in our current world, it’ll only be more difficult to own anything from this point forward as a result of inflation, interest rates, and a whole lot of other reasons that I won’t get into here.
Let me give you two scenarios:
Option #1 – Selling Now
Let’s say you have purchased a pre-construction condo a few years ago for $400,000. It’s now worth $500,000. In your mind, you would think, “AMAZING – If I sell this property now, I can make a quick $100,000 on my deposit from a few years ago!” Wicked return on investment right!?!
While that is correct, let me break down the numbers some more for you.
Your $100,000 profit would be eaten up by a 5% realtor fee, which is $25,000 + HST. Then, your profits will also be taxed at 50% for capital gains tax at your marginal tax rate (assuming this unit was not for personal occupancy). For a person making an annual income of $100,000, the marginal tax rate is 21.75% or in other words, another $10,875 would be gone from your profits. After that, you still need to account for the builder assignment and legal fees of approximately $6,000 combined.
With all of the factors above, your profits have been reduced down to almost half of what you originally expected – to an actual profit of approximately $54,875. The calculation below provides an illustration of this example:
Option #2 – Not Selling
This is the option that I would highly recommend. You close on the property, rent it out and make a healthy monthly cash flow each month. This is why the earlier question, “Is your property generating positive monthly cash flow?”, is so important. Assuming that your property appreciated by $100,000, you could opt to refinance your property immediately after you close on it. Doing this refinance would allow you to possibly pull out approximately $80,000 TAX-FREE to pick up another property!
So What’s the Catch? That $80,000 refinance will add another $350 per month to your monthly mortgage payments. However, as long as your rental income supports this additional monthly mortgage expense (i.e., the added expense does not put you in a net negative cash flow position), then you’re golden!
…and Here’s the Real Kicker – YOU STILL OWN THAT INCOME-PRODUCING ASSET! #winning all around!
So over the course of 5 years, which scenario above is going to make you more money? Selling now for a profit of $55,000 and try to double that with another property, or knowingly having TWO fully rented out properties that are still both continuing to appreciate in value?
YOU are Top Priority – It is for the reasons above why I will always try to talk my clients out of doing any selling unless you absolutely have to due to personal circumstances. When I advise my clients against giving me their business to sell their home, I always get great feedback for being completely honest and transparent. Watching out for the best interests of my clients is always top priority for us here at PPTO. We always want you to make the most out of your hard earned dollars!
The Wrap – So hopefully this helps you understand why I would always push for not selling your existing and pre-construction properties. If you have the ability to own real estate in Toronto, why give up an in-demand asset that will ultimately keep increasing in value over time? It’ll only get more and more difficult to own real estate in Toronto in the years to come, so hold on to those assets!