As an investor, it is essential to be able to determine when it is time to let go of an investment property in order to maintain a successful portfolio.
Blogger: Cam McLellan, CEO, OpenCorp
We are nearing the end of the financial year and it’s probably time to take a step back and reassess your investments. While my strategy is generally ‘hold, hold, hold’, if you have an underperforming asset, you need to know when it’s time to let go.
Early in my portfolio growth period I got to a point where I had used all the equity and capital I had and bought all the property I could. I was just moving out of a property in Melbourne and I knew it was going to be a terrible performer over the next five years.
So making the decision to sell comes down to basic maths. It is a pretty simple equation: you need to consider whether selling will free up equity that you can use to go and purchase another property. It is a matter of working out what the sales costs are going to be, including capital gains tax, agents’ fees and marketing, and checking that amount against the growth that the property could potentially have over the next five years. Now compare this figure with taking your money out and putting it into another capital city market that will have better growth.
In the past I have covered whether or not to make your home an investment property, and this links back to the MAP process (Market, Area, Property – check out our website for more on this). So you can work out whether a house is good enough to be an investment property by asking yourself, ‘Is the market right? Is the area right? Is the property right? Am I going to get the right rent? Is it the right size? Am I going to attract the right tenants?’.
You can use MAP to work out whether to hold or sell an underperforming investment property. If your investment is currently in a suburb that doesn’t have any growth potential (lack of infrastructure going ahead and employment generators) you should be thinking that maybe it isn’t the right one. Compare the numbers against the agent’s fees, capital gains tax and marketing and consider if you will make your money back by purchasing a different property; there is probably a pretty good chance you will. The right property can double in value in 10 years, versus a property that is sitting still and underperforming.