5 reasons to reshuffle your property portfolio
I am definitely a buy and hold investor. This is largely because the process of buying can be very costly when you consider stamp duties and other costs, and selling brings more expenses again, with agent commissions the largest of those expenses. Let’s not forget capital gains, which can further eat into profits. Building real wealth by flipping properties is often a slow process, which can fail to deliver real results.
However, there may be times where you find yourself at a crossroads with regard to a property you may own, and you are tossing up whether or not to sell. Some of the reasons for selling may be as follows:
1. The property is holding you back from investing in something with more potential
Most people gear a property by borrowing from a bank, however for many people, either as individuals or through their super fund, capacity to repay this debt is not unlimited. All lenders’ will use a serviceability matrix to establish the maximum amount a borrower or entity can afford, and while the additional rental income from a property adds to this matrix, most people will reach a point where there is no more serviceability.
Where there is an opportunity to buy property, which has excellent growth potential, but borrowing constraints prevent further borrowing, you may wish to consider shuffling the portfolio around. This may involve considering those properties which have already experienced considerable gain and which may be facing a long period of slow, or no growth. Areas which have recently boomed would qualify under this criteria.
2. The property is costing you too much money
If a property suffers from exceptionally low cash flow, yet is not showing significant signs of entering a strong growth period in the foreseeable future, it may be time to sell. Sometimes it is better to cut your losses and get out now, rather than compounding them.
This situation may have occurred either where you miscalculated the cash flows, or where forecast rental returns are subsequently unachievable. Many investors seem to want to hang in, committing money to a project with little chance of success, throwing good money after bad. It may be better to admit that you may have made a bad choice, and sell.
3. The property is attracting a constant stream of difficult tenants
If you find yourself in possession of a property which seems to take up more than its fair share of your time, attracts a stream of undesirable tenants who leave damage in their wake and which seems to have little chance of growing well enough to make all of this pain worthwhile, you may wish to consider liquidating and getting into something a little easier.
4. You simply bought a lemon
Everything goes wrong. High vacancy, low rents, bad tenants, a property worth less than you paid and your life has become one where you dread waking up in the morning because you know deep in your heart that something else is about to go wrong? Sounds like time to bite the bullet and sell. But if you do this, understand that not all property investing turns out like this and it is just like falling off a horse – you have to get straight back on, or else you never will again!
5. Things to consider
Before selling any property, weigh up all the costs and benefits. Remember that all investment property carries capital gains tax and unless it has not grown at all, you will have to pay it in the year it is incurred. You will be liable to pay tax on half of the difference between your cost base (that is the buy price plus all allowable costs) and your sale price, less allowable selling costs, at your highest marginal rate of tax, or in the case of super, at the applicable super tax rate.
Also be sure that you consider all of your potential selling costs too – sales commissions, loan discharge fees, loan break costs if any, etc. You have to ensure that the financial argument for selling supports this decision – you don’t want to sell to later find that your property went up in value far more than it cost you to get out.
And finally, do remember that one under-performing property does not mean that property in general does not perform well. I have many exceptional performers, all bought after ensuring that significant research into the existence of future growth drivers was undertaken. Learning exactly what these drivers are, and how to recognise them, is a crucial skill for all investors.