Upon announcing your decision to purchase a property, you’ll get asked one question by everyone, from family and friends, to the real estate agent helping you to find the perfect property: does this home seem like one you could comfortably live in for the next five years?
In the world of real estate, the famed five-year rule is often taken as a governing principle when it comes to buying a house. According to this rule, homeowners are urged to stay in the property they purchased for at least five years after acquiring it, or risk significant financial losses in the process.
Of course, there’s method to this argument. Aside from the transfer costs associated with buying or selling a property – which are one of the hidden expenses that both homebuyers and sellers often forget about – people who sell their property within five years of buying it also suffer financial knocks in terms of both the mortgage on said property and the interest rates they are paying in the very first years of owning a home.
When taking out a mortgage on a property, homeowners are required to also pay an amount of interest on the property they have bought. As the amount they owe on the property is higher in the initial few years after making the purchase, the interest that will be charged on that amount will be higher, too. Even with a fixed mortgage, more of each monthly payment will be used to cover interest payments in the first few years after buying a property than the amount that will go towards the capital owed on the property. That means it takes about five years to make owning a property a better deal than paying rent to a landlord.
If a person waits at least five years before moving again, they will be in a better financial position, having paid a more significant amount on the capital owed on the property.
While the five-year rule is a real estate staple, it certainly has exceptions. Here are just some of the instances in which selling again quite soon after buying a property does actually pay.
Exception No. 1: Your property value goes way up
The property market is notoriously hard to predict, and sometimes the market suddenly shoots up, leading to big potential financial gains for home sellers. In an instance like this one, the five-year rule might not weigh quite as heavily, and homeowners might want to consider selling while the market is hot.
While this does seem like the ideal time to throw convention out of the door, there are a number of factors that homeowners should keep in mind before just jumping in and putting a “for sale” sign out on the front lawn.
One such factor is considering where you want to stay after selling the property. If you are planning to move to a city or suburb where costs are lower and homes are generally cheaper, you almost definitely stand to walk away from the sale with some cash in hand. However, if you are planning to stay within the same area, and you are looking for a house with the same features and amenities as the one you are selling, that might necessitate paying more than you might make from the sale of your current property. This could leave you with much more debt than you had on the home you first bought.
Another important factor to keep in mind is the capital gains tax you will be charged on the property you are selling. If you are selling the home within one year of purchasing it, you will be liable to pay short-term capital gains tax. Capital gains tax is calculated by treating net capital gains tax as taxable income in the year the asset was sold. After 12 months, this gain is discounted by 50% for individual taxpayers. Unless the profit you make on the sale of the property is very significant, capital gains tax will devour all the gains you might have made.
Exception No. 2: The suburb is going downhill
It goes without saying that the suburb a property is located in has a very definite influence on the price that property fetches when it comes time to sell. While some suburbs may seem quite idyllic upon moving in, things can quickly change, leading to changes in the overall suburb landscape.
This often happens when there is construction in the suburb or when there are other changes that affect infrastructure or safety. It’s easy to imagine how the construction of a new prison could be disconcerting to the residents of a suburb and to prospective homebuyers looking into finding a property in said suburb. Similarly, the planned opening of a new shopping centre or corporate space will have an influence on traffic in the area.
If you have noticed changes that are pointing towards the suburb going downhill, now might be the time to cut your losses in order to avoid losing much more in a few years. Plans to construct places like malls and the like should already be red flags, and you should speak to your real estate agent about selling the property as soon as possible, before construction vehicles (and the accompanying dust and noise) arrive.
Exception No. 3: You really hate living there
It is advisable to launch a thorough investigation into the suburb you are planning to buy in before committing to acquiring a property but, of course, it is not always possible to really get to know a place until you have lived there for a while. For some buyers, this becomes a rude awakening, and they realise, far too late, that they dislike living in a specific city or suburb.
Even if a profitable sale is first prize, this should not be the only motivation for selling a property. If a homeowner finds, after living somewhere for a while, that they hate living there, this should be a good enough reason to decide to move elsewhere.
Real estate agents often advise homeowners looking to sell for this reason to perhaps consider rather renting out their homes, making them investment properties. While renters pay their mortgage and help to grow their net worth, homeowners can move to a suburb that appeals to them, while not sacrificing profits on their home.
Ultimately, being happy in the home you live in is the most important thing. Sticking it out and sacrificing happiness for years just doesn’t always seem worth it.
Exception No. 4: You’ve fallen upon tough financial times
Every seller has their own reason for wanting to put their property on the market. Some sellers want to move to a bigger property to accommodate a growing family, while others have to move for work or to be closer to family. For other home sellers, the decision to get rid of their biggest asset is a financial one, driven by them falling upon hard times.
Sellers might want to downgrade to something more affordable. They might decide to rent a property so they don’t have to pay a monthly mortgage, because the five-year rule means that they will only be in a better financial position as homeowners after having lived in a property for at least five years.
When financial challenges are at the order of the day, homeowners have to do what they have to do to keep their heads above water, and sometimes this means selling their property in order to save money.
If you are struggling to make ends meet and your mortgage is choking the rest of your expenses, this exception to the five-year rule might be applicable to you.
Just about every new homeowner is joyous at the prospect of moving into a new home upon buying it, and very few envision having to move somewhere else within five years of buying a particular property. Most real estate agents will advise homebuyers to make sure they are indeed willing to live in a property for at least the five years following the purchase. Making this decision puts homeowners in a far better financial position when they buy another property, and helps to ensure that they walk out of the sale with profit in hand.
However, there are certain exceptions to the five-year rule. When the property market turns and its favour is with home sellers, homeowners looking to sell within five years of acquiring a property do stand to make profits that are significant enough to justify the sale.
On the other hand, when a suburb is going downhill, waiting it out could lead to bigger financial losses than the ones incurred when selling soon after buying. Some homeowners realise that they hate a suburb after living there for a while, and others are forced to sell due to unforeseen financial pressure. Whatever the reason for selling relatively soon after buying a property, all home sellers should have an experienced and qualified real estate agent by their side when the time to sell comes. Find an agent you can trust by simply completing a quick questionnaire. We’ll recommend an agent that ticks all your boxes, whatever your specific circumstances