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Is There A Right Time To Sell An Investment Property?
In an ideal world for real estate investors, we would hold onto our properties and receive a high rental income perpetually. But as we all know, the world is not ideal. Especially when we talk about the world of real estate.
More often than not, properties are sold by people for personal reasons rather than investment reasons. People sell because of job relocations, divorces, upsizing, etc. But those are usually associated with houses which the owners have made their home. And even when there is obviously a financial element to it, surplus cash is viewed as windfall gains by homeowners rather than profits.
The investor on the other hand is supposed to view everything in his portfolio in terms of numbers. The assumption is that investors are more logical and pragmatic in their approach to assets and investments. So when does selling an investment property make perfect sense?
Is it self-sustaining?
The first clue that assesses the worthiness of a property to remain on your portfolio is whether it is paying for itself. Generally speaking, an asset is worth keeping as long as it does not cost any extra funds to keep it alive.
Real estate is an expensive asset to maintain. There are taxes to pay, carpets to clean, pipes to repair, shingles to replace, toilets to clean, and pest to exterminate. And this is just scratching the surface. You could be outsourcing these management issues to a management company. That is another cost to add up. But if the income you are generating can cover all costs and maybe leave a few bucks for you without needing your direct supervision, the obvious choice might be to keep it.
Why throw something of value away when it does not cost anything to keep?
That question can sound like great wisdom. But don’t be misled. Because when you factor in opportunity costs or depreciation, you are looking at a whole different ball game altogether.
Unlike a collectible figurine that cost a few hundred or a few thousands of dollars, a house goes into the range of tens of thousands and hundreds of thousands. Even millions. These monies can be significant enough to let you live off the interest should you put them in a fixed deposit.
If you are at a point where you have to decide whether to hold or sell, think about what else you could do with the money locked up as home equity. When you could have made an 8% gain on index funds and your investment property is barely breaking even, maybe holding onto it is more of an emotional decision rather than a logical one. Financial assets don’t require you to commit so much time as well.
Be prepared when you work out this numbers. Because reality can hurt.
There are many categories and classes of investments that can provide a stable return. Structured deposits, unit trusts, REITs, insurance, etc. If you have an objective of safeguarding your wealth, take a look at precious metals. Gold and silver have survived the test of time.
Is the equity in the property accessible?
You don’t have to miss out on a lucrative investment just because your money is locked into a house. There are credit facilities that allow you to extract the equity while retaining control over it. If this is new to you, read up on HELOC and home equity loans.
HELOC gives you a credit line resembling a credit card. The main difference is that you are now pledging your property as collateral. An equity loan works like a term loan that you draw down completely. You will then repay it by instalments.
This use of leverage is a classic strategy applied by high net worth individuals. On a best case scenario, you will be able to generate rental income, gain from appreciation, and used the cash generated from leverage to invest in other investments. But if you don’t have the appetite for huge risks, do practice pragmatism before going down this route. The unpredictable economy these days can send you into a tailspin if you are not careful.
The way you view depreciation depends on which angle you view your investments. Long term investors who don’t even think about cashing out love depreciation as they can use that to write down profits in their income statements. But if capital gains plays a huge role in your investment strategy, depreciation is the party pooper that takes away all the positive vibes.
What does the market data say?
The best way to see whether the demand of your investment property is going downhill is by analysing available market data. Declining prices is the obvious indicator that tells you that a market is going down. But take note that prices are just quotes. Home owners can ask for whatever price they want and buyers can offer whatever price they want. So it is not a good indicator to use when there are other better signals to scrutinize.
What is a better measurement of the demand is by tallying up the amount of time it takes a property to sell once it has been listed for sale. In high demand markets, homes can sell in a matter of hours. But when there is little demand, you can expect the transaction time to stretch for as long as your patience allows.
Even on average markets, transactions can take up to 3 months to materialise. So when transactions take 6 to 12 month to close, you could have bought wrong property in the wrong neighbourhood.
But of course everything can change with a simply policy change from the state. Maybe you are betting on that after all?
Long term prospects
It is not a coincidence that many real estate millionaires gained their wealth form getting in early on high potential land. They see a major changes and position themselves in areas that will benefit from national polices.
If you had made such a bet, you must also set a time frame on how long you intend to wait until you see major moves in your direction. If things are not moving at the speed you predicted, maybe it is time to move on. No point waiting for a hundred years to profit as you won’t be around to reap the rewards of your bet.