As with any investment, real estate has its good, bad and average performing assets and if you’re not careful, you could easily end up with a property investment lemon.
The problem is owning a dud property means:
- • You could be losing money because your holding costs may exceed your income (rent and capital growth);
- • You lose the opportunity to make better returns elsewhere; and
- • The lack of equity and rental growth will compromise your ability to keep growing your portfolio.
The key is in the questions
The best way to uncover an underperforming asset before it eats too far into your bottom line is to review your portfolio annually and ask yourself some hard questions:
- 1. Is this property performing like I expected it to?
- 2. Is this property outperforming the market?
- 3. If this property were on the market today, would I buy it again?
- 4. Is there anything I could do to improve my property, so that it generates a more attractive return on my investment?
- 5. Is this property likely to outperform the market averages for the next decade or more?
The answers to these questions help ensure that I retain a top performing property portfolio and that my money works hard for me.
The key to this is to analyse your investment goals and determine if your current property portfolio has you on the right path to achieving those goals.
What makes a property underperform?
The problem could be market related or relate specifically to your property. It would usually falls into one of four categories:
- 1. Timing: Buying at the wrong time in the cycle, when values are at or near the peak can mean that your property’s price may languish for a few years, or even fall in value for a while;
- 2. Price: Similarly if you pay too much, you’re likely to have a few years of no capital growth;
- 3. Location: Some suburbs underperform others and even in the better areas, some locations are not as desirable as others and underperform; and
- 4. The property itself. In other words, poor property selection.
If you’ve bought the right property at the wrong time or paid too much, you’ll generally find real estate is forgiving and in time your property will start to perform.
But if you’ve bought the wrong property or in the wrong location, sometimes you just need to bight the bullet and sell so you can buy something better.
After all, if a property has not performed well over a three- or four-year period, it’s likely to be a dud.
The answers to these questions help ensure that I only retain top performing properties in my portfolio and that my money is working hard for me.
Is it going according to plan?
One of the big mistakes many investors make is not having a strategy for their investments.
If you don’t have a plan, how do you know what to buy or if it’s performing as expected?
The other big mistake they make is not reviewing their property portfolio to make sure it’s performing according to plan.
In my opinion, this should be done with the help of someone who is independent as many of us get too emotionally attached to our properties.
If you’ve bought a dud, rather than ignoring it, ask yourself: why isn’t this property working like I planned?
Of course this assumes the strategy you’re following works. Remember, many investors fail because they’re following a flawed plan.
Maybe the answer is as easy as changing to a more proactive property manager, or maybe you could improve the property’s value and make it more attractive to tenants by undertaking some renovations or upgrades.
Sometimes it’s simply a case of allowing time to work its magic and waiting for the property cycle to move on.
Selling your lemon
While property is a long term investment, occasionally the right answer is to cut your losses and sell up so you can buy a better property.
However, if your property is tenanted, consider selling it at or near the end of its lease term to widen the appeal of your property by making it attractive to both owner-occupiers and investors.
But what if it’s the wrong time to sell?
Look at it this way: if, due to your financial capacity, you can only afford to hold five properties, you should aim to own the best five performing assets you possibly can.
I know that there are times when the market is flat and you may not get the price you would like, but waiting to take action until things pick up again will only see the gap between your underperforming property and better performing investments widen as the market improves.
At this point, it will become harder and more expensive to buy the type of property you’d like to own.
The sooner you can identify and offload an underperforming property, the better.
Sure, you may crystalise a loss or pay capital gains tax on the sale, and incur selling costs, stamp duty and acquisition costs on your next purchase.
And I understand that this may mean taking two steps back to move three steps forward.
But if you treat your property investments like a business — and that’s what all strategic investors do — you’ll understand that while it’s costly to dispose of a dud property, it’s even more expensive to hold onto an underperforming asset.