Whether you bought a home as your primary residence, or as an investment property, most of us aren’t thinking about selling right after buying – and for good reason. Unless it’s an emergency, it’s not a good idea to sell immediately after buying. In this post I am going to go over the implications of selling early, and the ideal timeline for selling your home.
Timeline
In Ontario, you can legally put your home up for sale the day you receive the keys. But just because you can, doesn’t mean you should. Buying property is along-term investment. Traditionally, the longer you hold onto that investment, the more money you will make. Ideally, you should own your home for at least 3-5 years before you even consider selling. This gives you enough time to recover from the transaction costs from purchasing the home, put a sizeable amount towards your mortgage, and make improvements to the home.
On average a home appreciates about 5% per year. Your cost to sell, including closing costs, is about 10% of the property price, so you would want to hold onto the property at least 2 years to break even. But remember, that is to break even. If you want to build wealth, you’ll need to hold onto the home longer. If making a profit is not your top priority - maybe you’ve taken a job in another city or there is some other time-sensitive reason you need to sell -the best option is to aim for breaking even. Owning a home for 2 years to breakeven is a just guideline; your break-even point will ultimately depend on your circumstances. It’s important to work with a real estate agent and mortgage broker to determine what the lowest price you could sell your home is to breakeven.
Mortgage Prepayment Penalties
If you’ve taken a mortgage to help purchase the property, your lender may charge a prepayment penalty if you’re thinking about selling your home before the term of the mortgage expires. The prepayment penalty is something that is agreed upon when you take out your mortgage and is usually 2-5% of the remaining balance on your loan. Read your mortgage agreement carefully to determine how much your lender is going to charge you to break your contract. The longer you stay in your home, the smaller this amount will be since you gradually pay down the principal amount.
Additional Financial Considerations
If you sell your principal residence within one year of buying it, you’ll have to pay a capital gains tax on the profits. If you do live in it for longer than a year, you earn the Principal Residence Exemption, and don’t have to pay the tax.
If you’ve bought an investment property with the intention of flipping, assignment, or to build and sell there is an anti-flipping rule that you should be aware of. Under this rule if you sell the property within a year of owning it, it is deemed a flip and the profit will be taxed as business income and is 100% taxable.
Buyer Concern
Real estate agents and buyers will be able to easily find out when the house was last on the market. If you list soon after buying it potential buyers may assume there is something wrong with the property. If you have no other choice but to list the property, an agent will help you price correctly and alleviate buyers’ potential concerns.
How Do You Determine When the Right Time to Sell is?
If you’ve waited a few years and are ready to sell, begin with monitoring real estate trends and market activity in your area. Are comparable properties starting to sell at a price that would get you a decent profit? Consulting with a real estate agent and assessing your own financial situation will help you make an informed decision. It’s important to evaluate whether you can recoup your initial investment and consider any potential losses before listing your home for sale.
I hope this has helped you set up a realistic selling timeline for your home. Sometimes things happen and you’re forced to change your plans and sell earlier than anticipated. When this occurs, you should have the knowledge you need to make the best possible financial decision, even if that means just minimizing your losses. Real estate is an expensive asset. Give me a call so that we can best strategize how to make you the most money possible out of it.
