When headlines are negative and talk is all about falling property prices, investors get very nervous and start thinking about selling. And sometimes it’s a good idea to cut your losses. But before deciding whether to sell or hold investment property it’s a good idea to rewind a bit and look at your original goals. Will the property you own help you get to where you want to be?
Let’s face it, for most of us property investment should be a long game, unless of course you are a developer of flipper. It costs so much to get onto the property ladder that we need a bit of time and good capital growth before we make a return on our investment. And it’s pretty expensive getting off the ladder too, so a knee jerk reaction is not what’s called for here.
What is really important to recognise, however, is that not all property goes up in value. Many have bought without realising this and only worked it out too late. Or they bought in a hotspot without realising that what goes up can go down. In the case of some mining towns, prices now are lower than they were before the boom and with little hope of recovery.
Faced with the prospect of years with little or no growth – or, worse, negative growth – investors need to make tough decisions. Opportunity cost is what we need to focus on. By this I mean: could you get a better return on your money by doing something else with it?
What often happens, however, is that we sell the wrong property. By that I mean we sell the good ones and keep the duds. The rationales all seem quite logical on the surface. Here are some examples.
“I’m selling this one because it’s made money and can’t possibly go up too much more.” Well, this might be true if you bought in a “hotspot” but won’t necessarily be true if you bought in a blue chip area. I remember thinking this about Sydney property back in 2003…
“I’m not selling this one because I’ll make a loss.” It sounds like you made a mistake buying this one, and while it may hurt in the short term, it could be time to cut your losses.
“I’m selling this one because it’s the easiest one to sell.” Alarm bells should be ringing here. Good assets are easier to sell than bad ones, which means you’ll offload the good one and keep the dud. Is that what you really want, long term?
“I’m not selling this one because I want to wait until it grows in value, it’s got to go up eventually.” I’ve got two words for you: opportunity cost. What else could you be doing with that money while you’re waiting (hoping) for the market to do you a favour?
“I’m selling this one because it’s not positively geared.” Whether something is positively geared or not depends on a number of factors, not the least being the amount of money you owe. The risk isn’t so much in the amount of money you owe, it’s in the quality of the asset. High yielding properties are usually very risky assets.
What we really need to be looking at is which is the best asset to retain. The location is the primary factor here and it’s important to assess whether it has the foundations for long term growth. But location on its own will only do so much, the actual property itself will make a huge difference. We’ve created a framework to help you work this out, it’s a free download and you’ll find the link below in the notes.
Don’t fall into the trap of selling your best property and retaining those that are least likely to help you achieve your dream of financial freedom. And if you do have a lemon in your portfolio, even though it’s hard to face facts, the sooner you do, the better off you’ll be.
DISCLAIMER: The tips included in this video are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.