Five times to say goodbye to your investment
Date Posted: Feb, 2018
By Rich Harvey, Managing Director propertybuyer
We’ve seen it before. A once happy pairing is now struggling.
One party is full of vim and vigour for the relationship, keen to make it work, willing to put all practical thoughts aside and see things through to the end.
The other gives nothing back. No effort, no attempt to fulfil their end of the bargain. All the potential in the world but in the end… nothing.
Real estate investors obviously don’t try to buy future failures, but there comes a time in the relationship between owner and property when one must offload the holding because, frankly, you deserve better.
For example, in the current Sydney market where falling clearance rates and tempered capital gains are becoming the norm, a bold assessment of your property portfolio and how it fits with your future is due.
To help, we’ve revealed five times when you should tell your holding, “It’s over!”
- The future is a-changing
When selecting a cracker jack investment, there’s a fair amount of educated speculation involved. Strong research and thoughtful process should help you identify those areas with the best chance of seeing decent returns in the future.
This is where vigilant monitoring of your portfolio is essential because success isn’t guaranteed.
A change in government policy, a shift in strategy by a major employer or a failed piece of planned infrastructure could all come into play to destroy the price growth prospects of your chosen location or property type.
If you become aware of circumstances that will gut the potential of your previously top notch real estate pick, then don’t be tied to emotion. Be prepared to cut and run. As the recent mining boom and bust demonstrated, in the worst instances, you could find yourself holding onto an asset that’s falling in value in the vain hope it will “turn around”. If all the major employers have deserted town and there are little prospects of recovery (or it will be a 15 year recovery) then you may be better off cutting your losses and start afresh.
- Create a cash crash buffer
Too much equity may not sound like a problem but if a fierce assessment of your finances shows you’re teetering on the edge of being unable to service your commitments, then consider offloading a holding and building in a buffer.
Having a cash buffer is essential for long-term investors. Unexpected vacancies, a fall in rents, a sudden job loss or sickness can see those skating perilously close to cash-flow cliff lose their footing.
The solution is to free up some of that locked away value and leave it in a more liquid state, such as an offset account, so should the worst occur, you’re ready and under no pressure to offload quickly, which inevitably results in an unappealing sale price.
The trick is choosing which property is the best to sell, and that takes a reassessment of your strategy and your holdings – something that could require professional advice.
- Interest rates are on the rise
Like the creature lurking beneath the Black Lagoon, interest rate rises can be a scary surprise for unsuspecting investors.
We’ve enjoyed a stellar run of affordable lending for well over a decade now and it may feel like we’re in the new norm, but economic realities are that the interest rate lever may be pulled at any time by the RBA.
Even more unsettling is lenders can implement their own increases without any reference to public policy.
When rate rises are on the cards, it could be time to sell down a little bit of the portfolio in order to save the rest.
Key to this decision is relying on those in the know. Your mortgage broker can help with keeping track of your finances while your property advisor can help identify which of your investments will yield the best outcome once it’s going, going, gone!
- Something better comes along
Sometimes we find our wandering eye fixes upon a stunning investment prospect, but having your dollars locked away in a less stellar venture is frustrating.
This is one time when it’s ok to say, “It’s you not me!”. You know you deserve better.
Opportunity costs is essentially where you’re losing money because it could be put to better use in another holding.
If, after careful consideration and analysis, you locate another property that will work harder for your wealth, it might be feasible to sell one of your current investments.
Just make sure you take into consideration ALL the costs of selling out of one to buy into another before you make the leap. Selling and buying again could mean you lose at least 5% in fees so it needs to be a compelling alternative to sell out.
- You’ve won the game of life!
Despite some of the doomsday scenarios above, there is one time when selling down is entirely satisfying. It’s that moment you’ve planned for all along.
Yes – it’s time to start living off your investment strategy.
If your program was too accumulate, wait and eventually sell out off some holdings to reduce the debt on others, then congratulations because the time is ripe.
In many respects, this shift in thinking for long-term investors can be difficult – particularly because training yourself into the entrenched mind set of ‘Never sell’ can take so much effort. It can be hard to let go even when you’ve reached your goal.
It’s again here where strategy comes to the fore. If you stick with the plan and pop a few of the right properties on the market at the right time, you’ll rarely live in debt-free regret.
Selling down isn’t a step to be taken lightly, but neither should it be considered a taboo move. Agile investors relying on sound financial advice invariably benefit in the long run as they can avoid becoming stuck in a rut with no way to break free.