Should you automatically dump them?
Maybe... or maybe not.
Essentially the common real estate advice you’ll always hear is that you should “buy and hold.”
This is so that the owner will have the maximum opportunity to achieve capital gains over time and it’s because of the large costs of recycling equity.
The gains derived from a purchase should offset the costs of removing your equity from one property and using it on another (a/k/a recycling your equity).
Before deciding to sell, ask yourself the following questions:
- What is my strategy?
- How long have I been holding the property?
- Can I affordably improve value and/or increase rents?
- Can I use the equity better in a higher growth location?
- Will I lose money by selling?
Possible Reasons to sell
In economics, “opportunity cost” is defined as “The loss of potential gain from other alternatives when one alternative is chosen.” The example given is: "idle cash balances represent an opportunity cost in terms of lost interest".
You may be missing out on opportunities to grow your portfolio when you let the equity sit and do nothing with it.
But what if you have no equity in a property? Does this let you off the hook in making a decision?
No, it doesn’t, because obviously you can sell the property. Of course, you must include all entry and exit costs, holding costs, land tax, income tax, etc. to arrive at the true opportunity cost figure.
So then, if your opportunity cost is higher than what it will cost you to recycle your equity, then you very likely should sell to take advantage of an opportunity to grow your wealth.
Poorly performing property
If your property portfolio is performing below where it needs to be at in order to achieve your goals, then you probably should sell.
Are your rental returns falling with no end in sight?
Is it costing you too much to own and/or maintain it?
Then you’ll likely need to off-load it and move on to a better opportunity.
Is it selling below the suburb it’s in? Why? Is there anything you can do to improve your returns?
Signs to look for
1. “Ugly” properties are selling
You know the homes I’m talking about. These are properties that savvy investors typically avoid like the plague.
When you see homes with poor or non-existent natural lighting, close to a noisy road or area (e.g. near an airport), bad strata management, undesirable suburb, etc. selling, it may be a good time to sell (that is, if you’ve decided selling suits your goals).
2. Agents are selling their own houses
Like anyone, agents are concerned with preserving their own interests. As they have their finger in the markets every day, they don’t wait for the data to confirm their belief that it’s time to sell, they just do it!
3. Main road properties are selling
Would you want to live on a very busy road? Of course, not many of us would, but land is very cheap alongside busy roads. First time home buyers can more affordably enter the property market buying such homes.
You’ll often see “for sale” signs in these yards, but when was the last time you saw “sold”?
Next time you’re driving down a busy road take a look at the homes alongside it. See a lot of “sold” signs?
There’s your indicator that now could be a very good time to sell.
To find out more about reading the property markets, the indicators to look for to spot great deals and more, come along to our next Property Investor Night. This FREE event is held every month at a location near you. Seats fill up fast, so book yours now!
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
Read more expert advice articles by Sam
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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