While most savvy investors don’t like to let go of their properties, is now the time to cut ties with your under performers?
Welcome! Is now good time to sell your underperforming property?
Well, there’s an old saying in real estate circles that you should buy and never sell. And while this has merit in many situations, is it always true? The answer: it depends. It depends on what property you bought, where and for how much. If you bought an underperforming property and by underperforming, I mean that it hasn’t experienced much growth and it’s not likely to it’s costing you money to hold every week and it doesn’t have any opportunity to add value then now might actually be a good time to sell it. Why? Because we’re currently in a once in a generation period when the property tide is floating all boats, with 94% of areas across the country experiencing substantial value growth on the back of Covid instigated stimulus packages, the lowest ever interest rates on record and very few properties for sale.
The current rate of growth is already starting to taper and B-grade properties will again start to languish. The reality is that savvy investors aren’t afraid to offload underperforming assets. That’s because they consider the opportunity costs. They don’t want to miss out on opportunities elsewhere when quality research reveals that the future growth in their location might take a long time, if ever, to arrive. Unfortunately, however, many novice or accidental investors get stuck playing the waiting game. Now, you may have bought a property in the hope that it will increase in value, so you sit and wait for years without anything happening, and because you don’t want to feel like you’ve failed, you stubbornly hold onto the property that’s flatlining in some sort of blind hope. And often the properties in your own backyard or it’s close to your home because you know the area and you want to be able to drive past it.
Educated investors understand that there are literally thousands of locations across Australia that offer better chances of capital growth over the short to long term. That’s why they’re not afraid to sell a property that’s not kicking major capital growth goals. And yes, there are significant changeover costs involved in selling and buying elsewhere. But selecting a location on a property with strong price growth potential means you’re likely to make that back and more in equity growth within a few years. By naively holding onto a dog property and hoping for a market upswing that has no bearing to reality, you’re likely to be out of pocket by much more over the long term. In fact, holding an underperforming property might end up costing you hundreds of thousands of dollars in lost capital growth. So let me illustrate this in showing you the difference in performance between a good property and an underperforming property. Let’s take a $400 000 property in an average growth location experiencing 5% capital growth compared to a high performing location at 8% growth. Remember, 80% of growth comes from the location of the property itself. Now, over 20 years, this 3% growth differential means the higher growth property will have grown in value over $800 000 dollars more than the lower growth property, which equates to a 75% increase with just that 3% difference in the growth rate. So, as you can see, it’s all about growth.
What drives a high performing property? Well, primarily it’s capital growth and sustainable capital growth comes from scarcity, which which means there’s more demand and supply. This occurs in tightly held areas on the back of newly committed infrastructure, along with employment diversity that creates strong and growing income demographics so homeowners can continue to afford to pay higher prices and support that ongoing price growth. To make the property sustainable, it needs to be cleverly structured so that there’s positive cash flow and the property looks after itself financially without needing any of your salary or savings to support it.
How does your property stacked up now against this high performance criteria? Don’t get caught up in the current FOMO or the ‘fear of missing out’ frenzy and be fooled by the value growth your property may be experiencing right now, because these, as I’ve said already, are once in a generation circumstances that won’t last long and won’t come around again for many years.
Savvy investors know the signs of market peaks and choose moments, like we’re currently experiencing, to sell their underperforming properties so they can then invest elsewhere. Unsophisticated investors, on the other hand, leave it too late and end up with a property that starts to go backwards in value. Mining towns are good examples of this over the last decade. Many investors in remote one-industry resource towns had FOMO and are now stuck with a property that’s worth far less than they actually paid for. So if you can only afford to own two or three investment properties to grow your nest egg, then you need to make sure that you are in the best high growth properties that you can actually afford.
In this light, selling an investment property that’s not doing its job, which is to grow your wealth long term, is actually a smart move and now is one of those rare windows of opportunity when it’s actually worth considering.
So if this sounds like you, reach out to an independent property strategist at PIPA the property investment professionals of Australia and get them to do a cost benefit analysis on your property to decide if now is a good time to sell and invest in a higher performing property.
That’s more food for thought.
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