The ‘prime markets’ of Australia, particularly Sydney and Melbourne, have seen a significant decline in home value over the past months. Should investors consider selling their assets based in these markets and seek investment opportunities elsewhere?
Smart Property Investment’s Phil Tarrant has nine income-generating properties in New South Wales, eight in Queensland and one in Victoria, including townhouses, units and freestanding houses. Over seven years, these assets have produced 39 per cent compounding growth from an initial investment of around $250,000.
While all of the properties in his portfolio definitely served a purpose, most of the growth came from the assets based in New South Wales. “I'd like to say that we bought in the right place at the right time,” the investor said.
According to Right Property Group’s Steve Waters, while there’s no denying that a bit of good luck contributed to the portfolio’s success, since Mr Tarrant happened to enter the market just as it’s starting to recover from hitting the bottom, the ultimate driver of growth is the investor’s decision to take advantage of the present opportunities.
He explained: “It's about controlling the opportunity. You just happened to have all the proceeds of that opportunity come in a very short period of time. Sydney has outperformed the averages so to speak.”
“Investing is about controlling the opportunity. It’s looking forward and around the corner, over the hill, to wherever the fundamentals are and setting yourself up to take advantage of the growth that's going to come,” Mr Waters highlighted.
Aside from getting into the investment game sooner than later, investors can also maximise their wealth-creation opportunities by improving their cash flow.
Moving forward, Mr Tarrant and his team are looking to adjust the portfolio’s cash flow in order to have more chances of adding assets and ultimately enjoying a higher return on investment.
As most of his properties in New South Wales, particularly in Western Sydney, Southwest Sydney, , Blacktown, Mount Druitt and , have already doubled in value, is it time for the investor to sell down in order to improve his portfolio’s cash position?
When you decide to sell your properties, there are two main factors to consider in order to determine whether you actually profit from the sales, according to Keshab Chartered Accountant’s Munzurul Khan.
If the plan is to sell a property and recapitalise the gains into other markets, the investor must consider a variety of associated costs, including the selling cost, the cost of capital gains tax (CGT) and the repurchase cost.
According to Mr Khan: “There's so much more than just selling a property. There's CGT, exit fees in terms of your loan, agent's costs and buying costs—there's always a cost somewhere.
“If you are contemplating actually selling any asset, no matter where it is, have a look at the net result. You need to fulfil all of those costs. When you break even, then you are making the profit,” he added.
Aside from the costs associated with selling a property, Mr Khan also highlighted the importance of ‘time in the market’ versus ‘timing the market’.
When selling an asset to have it replaced with another asset, consider the timeframe of your investment. The New South Wales property market, arguably, has not reached its peak yet. Whether you get out of it in the next five to seven years, or within one to three cycles, can influence the profit you gain from your property sale.
Mr Khan explained: “On day one, you most likely start with a negative equity. You need to fulfill that negative equity and then you go into the growth. The question is: Once New South Wales reaches its peak, do we take some of the profit as such?”
“New South Wales properties arguably [haven't] reached [their] peak, but if we look forward, do we still see that history is repeating itself? Do we still see the similar level of growth?” he added.
At the end of the day, investors are advised to make sure that they actually get their money’s worth when selling instead of a mere immediate gratification brought by extra cash.
While the property markets of New South Wales, particularly Sydney, are not in a stellar condition at the moment, the capital city will remain a global landmark. Getting out of it and letting go of the investment opportunities it has to offer will have certain repercussions.
Investors can opt to sell their property, take the money and recapitalise it in another market, like Queensland or Western Australia. At the end of the day, it might be harder to get the same quality of properties you had in Sydney, at least not for an affordable price.
Should you decide to reenter the Sydney market, it might also be a lot harder than when you first stepped into the property ladder years ago.
According to Mr Khan: “I think that's the big $64-million decision to make. Sydney is Sydney, it's not regional Victoria or Queensland or wherever else it is. It's Sydney, it's a world-class city. To replace what you're selling in a city like that, there's a bigger cost involved.”
Sydney’s ‘brand promise’ is likely to maintain the demand for dwelling in the area. Moreover, since Mr Tarrant’s properties are in the more affordable suburbs of New South Wales, it’s largely preferred by tenants looking to reside in the capital city.
If, like Mr Tarrant, you are fortunate enough to be ‘in the right place, at the right time’ years ago, when the NSW markets are just on their way up, the best decision would be to hold your properties for as long as you can and find other ways to improve your cash flow, like adding value through renovation, Mr Khan said.
“When there is a bit of profit after the property has been sold, that's the immediate gratification, so to speak. If we were to hold on to it, that is the additional level of the growth. That is the additional opportunity gain,” he concluded.
Tune in to the Phil Tarrant’s latest property portfolio update on The Smart Property Investment Show to know more about the strategies he plans to implement in order to continue growing his multi-property portfolio.