Researching a suburb before you buy a property is clearly important. However, keeping up the research after the fact is a task that’s a little harder to maintain.
But if you don’t know what’s happening in the neighbourhood, how will you know the best course of action for your property?
While clearly investment is about long-term capital growth, sometimes circumstances are such that it’s necessary to consider moving your property on early. By keeping up with local economic growth, jobs growth, infrastructure changes, demand, vacancy rates and future developments, you can make the right decision at the right time.
In this instance, the circumstance I want to look at is a property that is not performing to expectation, and the cost of selling versus the opportunity cost of holding.
Here’s why your knowledge of the local market is so important
If you know what’s happening with the area you’ve bought in, you’ll be aware when your property is underperforming or in danger of struggling. An example scenario might be a property that’s only grown in value by 3% in five years of ownership (as is currently happening in some suburbs around Australia).
But, because your money is tied up in the property, you can’t purchase another, hopefully more successful, investment. You’d need to weigh up the cost of selling against the potential profit of purchasing another property.
It’s not as simple as just selling and buying
There are a lot of costs involved in selling a property, including:
- Legal fees;
- Agent’s fees; and
- Capital gains tax (if you’re lucky).
Then there are the costs of buying a new property. Things like:
- Stamp duty;
- Legal costs; and
- Financial costs.
These costs add up to tens of thousands of dollars, and could undermine any gains you might make in buying another investment.
But if you don’t sell, what’s your opportunity cost?
On the other hand, we have the cost of a missed opportunity.
If you stick with your current property, how much might you miss out on in a more successful investment?
Unfortunately, there are no hard and fast rules when it comes to deciding whether to sell or not. Nobody can predict exactly where the market will go.
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 annually review your portfolio and ask yourself some hard questions:
- Is this property performing like I expected it to?
- Is this property outperforming the market?
- If this property were on the market today, would I buy it again?
- Is there anything I could do to improve my property, so that it generates a more attractive return on my investment?
- 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.
Let’s go back to my earlier example.
If your research reveals that another suburb is steadily gaining 9% annual growth, the numbers may reveal that it’s best to sell your 3%-growth asset because the cost of selling is less than missing out on the better opportunity.
You’re not done with a property once the dust has settled
Buying a property is just the first stage of the investment.
The term ‘set and forget’ is bandied about, but don’t take it too literally.
Keeping a keen eye on the local market and your property’s performance will give you the best chance of maintaining a truly successful portfolio.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.