Know When To Hold 'em, Know When To Fold 'em...
The Sunday Age
Sunday January 20, 2008
Investors know all about buying, but they should also know when to sell.
WHEN it comes to owning an investment property, investors tend to put most of their efforts towards selecting the asset, financing it and negotiating the purchase. After they buy, they attend to day-to-day issues like tenant selection and property maintenance, but seldom take the time to review the performance of their asset and assess whether it's doing the job they need it to do.Ideally, residential investment property should be held for at least seven to 10 years to ride out market fluctuations and maximise compound capital growth. However, each property performs differently - and not all of them perform at a rate that justifies their long-term inclusion in your portfolio. For this reason, it's essential to review your property's performance every two or three years and make the necessary adjustments if it falls short of the mark.How do you evaluate whether your property is producing the goods - and what should you do if it isn't? If you're investing in the Melbourne market, the best way to find out whether your asset is up to scratch is to determine whether it is growing in value at a faster or slower rate than the Melbourne-wide median. To do this, ask a couple of local real estate agents for an appraisal of the property's current market value. Divide this figure by the purchase price and subtract one to work out the percentage increase for the total holding period.Then, find out the current Melbourne median value, along with the median for the year you bought the property. Divide the current median by the older median and subtract one to work out the percentage increase for the holding period.If you want to take things a step further, you can compare your property's growth rate with the growth rate for your suburb. The Real Estate Institute of Victoria publishes regular updates on Melbourne-wide and suburb-specific changes in median values.Be aware that the small number of properties sold in some suburbs means that a few exceptionally strong sales results can skew the median figure. For this reason, the Melbourne-wide median should be your primary benchmark.If its growth rate is higher than the median growth rate, you know it's earning its place in your portfolio. Sit tight and review its performance again in two or three years' time.If its growth rate is lower than the median, there's a reasonable chance that this trend will continue. At this point, you need to put emotion aside and look at your investment with a critical eye. Is it worth holding on to your asset in the faint hope that things will turn around, or are you better off selling it and putting the proceeds into something that will work harder over the long term?If your property's performance is pretty much level pegging with the Melbourne median, you're in a grey area. Here, it may be helpful to consider how much longer you're intending to hold the property. If you've already held it for seven to 10 years and only plan to hold it for a couple more, time is working against you because transaction costs such as agents' fees, advertising expenses, capital gains tax and stamp duty will eat substantially into your profits. In this case, it's probably appropriate to sell it in two years as planned. On the other hand, if you've only owned the property for a few years and plan to hold it for the long term, time is on your side. It may be best to sell it now and reinvest your money in an asset that will work harder for you.When you're assessing your investment property's performance, it's also a good opportunity to evaluate your financing arrangements. The residential loan market changes constantly, so reviewing your loan structure, interest rate and fees could save you a substantial amount of money, freeing up funds that you can put towards reducing your debt.Mark Armstrong and David Johnston are directors of Property Planning Australia, which advises on property and finance strategies, propertyplanning.com.auHandy hints? Review your investment property's performance every two or three years.? Compare its capital growth rate with the Melbourne-wide median growth rate.? Review your financing arrangements to minimise holding costs and free up funds to reduce debt.
© 2008 The Sunday Age