An Introduction To Property Investing - Part 3
In Parts 1 and 2 of our three-part series “An Introduction To Property Investing”, we considered what is meant by the term “investment property” and then the buying of investment properties (Click Here to read Part 1 and Click Here to read Part 2). While it’s easy to get caught up in the excitement of investing in property, here in Part 3 of our series, we look at what can often be a dilemma for investors - how to decide whether it’s time to sell an investment property.
The following are some of the principal issues that should be considered well before making a final decision to sell an investment property.
Decide what is motivating you to think about selling
Selling any property is time consuming, often stressful, and not without significant costs. Therefore, before you do anything, be very clear about what is motivating you to consider selling.
We will all have different motivating factors. But the most common are serious concerns about increased holding costs (repairs, insurance, etc.); financial stress; and believing prices have peaked with the next movement being downwards. Or it could simply be that the time has come to transition your wealth out of property so it can be used elsewhere, for example, deposited in an interest earning bank account, or as money for retirement etc.
Whatever it is that is motivating you to think of selling, analyse it carefully and make sure it has real substance. Don’t sell simply because John and Mary down the road have said they’re selling their investment property; or a real estate agent tells you it’s a good time to sell. Agents are only paid on commission when they sell so they will always only have one message for all owners - “Now’s the best time to sell”.
Understand the current environment
It is important to understand what the property investment environment currently looks like and where it might be heading. That’s not to say you should take your findings and then just do what most other investors are doing - whether that’s selling, holding, or buying. But you should use them as part of your overall decision-making process.
Most often there is no clear picture of the investment environment. On the one hand there may be very strong fundamentals for continuing to hold a property but, at the same time, there are also a lot of market factors against doing so. This means that many investors will be in a dilemma about selling and will need expert advice.
Understand the current property market cycle
Property markets operate in cycles. While many investors like to think they can time their buying and selling to maximise capital gains, predicting market peaks and troughs is almost impossible as no two upswings and downturns are alike.
When considering market cycles, always keep in mind that at the same moment in time, property in different parts of the country will typically be experiencing differing price movements. For instance, the Gold Coast might be seeing price gains while Perth is in decline. This is commonly called the “Australian Property Clock” with 12:00 representing a peak in prices and 6:00 being the bottom of the cycle.
While the Australian Property Clock should not be relied upon in isolation when thinking about selling, it is a helpful tool when considering the market cycle.
Assessing the quality of an investment property
As most investors know, some properties excel at meeting expected investment requirements while others do not. Therefore, always assess the quality of your investment property when you start to think about selling.
At a very simple level you might want to grade your properties into categories such as:
Gold – Excellent for both capital gain and rental yield
Silver – Average for both capital gain and rental yield
Bronze – Under performs all around
These categories are not set in stone as you might have a hybrid property which doesn’t fit a particular mould. For instance, it’s great for capital gain but has very poor rental yield (this is common with prestige properties).
Any decision to sell or hold should be made with full knowledge of whether your property meets your particular investment aims. This is not a case of “one size fits all” as different investors have different requirements, for instance, some are happy to have an investment with low rental yield/strong capital gain while other need high rental yield and can accept only moderate capital gain.
We generally recommend retaining “Gold” properties where this fits in with an investor’s overall investment aims. What to do with “Silver” properties is a more difficult issue as several additional factors come into play such as the investor’s stage of life. If they are about to reach retirement, the property is mortgage free and it’s providing a reasonable income, the best decision might be to hold it. Alternatively, if they are in their 30s or 40s with a solid salary expected over the next 20 years or so, they might decide to sell and move their money to something giving better returns (such as buying a “Gold” property which will provide far better financial returns than their original “Silver” property in the longer term).
We usually recommend selling “Bronze” properties.
There is no magic formula to assessing the quality of an investment property as much will depend on the owner’s particular circumstances and financial goals. However, its quality does need to be carefully considered and an honest assessment made. If a property is not meeting your current investment goals, it’s probably time to sell.
Consult the right advisors
One of the biggest difficulties for both sellers and buyers of any property is getting reliable and honest advice. The principal reason for this is the lack of adequate regulation in the property market arena. For instance, there is no minimum education standard required to become a real estate agent and almost anyone can obtain a licence after completing a short online course.
You should therefore only review matters relating to your investment property with properly qualified and trusted advisors. Typically, this will include an accountant, financial planner, conveyancer, mortgage broker and real estate agent. These experts can provide insights on the financial implications of selling, the timing of the sale, tax considerations, and alternative investment opportunities.
Choosing a real estate agent
If you do decide it’s time to sell, to achieve a successful sale you will need to appoint a real estate agent who is right for you. We believe the following will help you make the right decision:
- Choose someone you trust and feel comfortable working with.
- Choose someone familiar with the market where your property is located.
- Choose someone who actively listens to you and understands what you want.
- Chose someone who has good experience and can identify the best method of sale for your property (see what other buyers/sellers have said about this person by checking verified testimonials on independent websites like RateMyAgent etc).
- Chose someone who will provide you with an honest and reasoned assessment of your property’s correct market value (don’t just go with the highest valuation as some agents deliberately over value in the hope of securing your listing).
Choose someone who you believe will provide you with the best possible service and this may mean not necessarily selecting the agent with the lowest commission.
A real estate agent with the correct skills will be able to guide you through the sale process and provide valuable input that should help ensure you achieve the best possible sale result. And very importantly, he/she should be able to remove from your shoulders a lot of the stress of the sale.
For more information about selecting the right agent for you, please Click Here to read our article entitled “How Do I Know If I’ve Found The Right Real Estate Agent? They All Tell Me They Are The Best In The World!”.
Conclusion
There is a lot to consider in deciding whether to sell an investment property. But, by giving sufficient thought at an early stage to the steps we’ve identified above, it will help to protect you from a poor sales experience, or, even worse, selling and then experiencing “Seller’s Remorse” at a later date.
If you should have any questions about this article or if you would like a confidential discussion about how we can assist you with the sale of a property (whether or not it’s an investment property), please contact Peter Turner at Turner Mayes Real Estate.