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Holding On For Market Highs
A huge part of property investment is about buying and selling. Although you do not necessarily have to buy at market lows and sell at market highs to be profitable, it is what every investor aims for. Newbie property players assume that successful investors do this all the time as if they are strolling down the national park. That cannot be further from truth. Determining market highs and lows is very difficult, if not impossible. If this can be put down into a science, everyone who puts a few hours into studying it can time their property investments to perfection. Scholars will be the best investors in the world.
In the Singapore property boom of the 1990s, savvy investors were selling their real estate when everyone else was buying. The clear reasoning was that property prices had hit historic highs and investors are ready to cash out at huge profits. They had bought properties at their lows in previous years, rented it out for rental cash flow, and held onto them until prices and value rise again. Property markets move in cycles.
As recently as right now, property buyers are coming out by the dozens to purchase properties when record prices are consistently reaching new highs. Some properties do not even make sense when numbers are tabulated to calculate returns.
But just as history has taught us that property prices move in cycles, history has also taught us that the market is driven by emotional and illogical decision making. When prices are rising, more people will want to buy in the hope of reselling at an even higher price. Some get into a buying state in fear of missing out. Others buy for fear of future prices being unaffordable. And when prices are going down, the masses start to panic and sell for fear of incurring bigger losses if prices drop further.
The thing of concern is that most people buy and sell properties at the wrong time, highly influenced by the direction of where the market is heading. A savvy investor will however, start selling when everyone is buying and buy when everyone is selling. It is a calculated decision made without the influence of emotions. Remember that although it is important to get involved in the market, it is equally important to see your assets as an investment and avoid emotional decisions.
A key concept of successful real estate investment is the ability to hold until prices go up as per the market cycle. This means that rental cash flow is critical to your success. This is where a lot of investors fail as they buy with the sole intention of making a profit from capital gains. They over-leverage without a proper cash buffer to withstand market slowdowns. Defaults pile up as soon as vacancies occur and are forced to sell at a loss.
When projected rental yield can barely cover the mortgage and expenses, it is a clear sign that danger is waiting to pounce. An investment property with a month of negative cash flow can be bearable. But if 2 properties stack up with 2 months of vacancy each, you will be looking up at the heavens to pray for a miracle that will not come. This is a situation that can take you to foreclosure or bankruptcy before you even sell off your property holdings.
The take away from this discussion is that as an investor, you should be looking for properties whereby the rental income at least meets your expenses which allows you to sit on it for a good few years until you can sell them on the open market for a good profit. It has recently become more difficult to do so with policies on stamp duties. Be careful of bad investment criteria.
Putting all these points into perspective, it is also inevitable that an investor will get burned once in a while. When a property turns out to be a blood sucker that sucks your cash flow like a vampire each month, the best thing to do is to sell as soon as possible. Usually it is your emotions that is stopping you from selling one of these. You might make a loss. But you can use the funds from the sale for other investments and fully halt the bad property from further burning a hole in your bank account. Your profit and loss statement will praise you for that.
If you are on your way to a life of property investments, the sooner you run into a “loser” the better. You are going to run into one of them sooner or later. You learn from experience and move on. Don’t blame yourself or start cursing your luck. Success and failure is part and parcel of everything we do. You will make everything back when you find “winners” to put into your portfolio. Holding onto a “loser” is the worst thing you can do.