Rental yield only 3% - should I sell (cut loses) vs trying to hold?

[mixedup]

Would appreciate some advice on what you would do in this situation and why.

Question - Should I sell?

That is sell based on a "cut your loses" and don't keep trying to hold a property that is costing too much to hold. The alternative to hold, incur some losses per year, awaiting the market to pickup & continue growing.

Notes:

1. Rental yield is ~3% only
2. Negatively Geared: Last years summary: Loss before tax benefit $34k, Loss after tax benefit ~$24k (assuming/not including any growth)
3. Property Value ~$650k, so therefore overall loss relative to value is ~3.7% (i.e. assuming zero growth in the year)
4. Finance: Close to 95% is under finance (hence interest costs are high)
5. Property (currently home) does have DA (for townhouses) but it's too much of a stretch for me to carry out now
6. Strategy now would only be to Hold and wait for growth overtime (to builders/developers)

My thoughts (tell me if I'm flawed in my thinking or not):

• Noting the weak rental yield I would need the market to pick up and be at over 3.7%/annum growth just to break even
• My gut feel is probably I should be strongly considering selling this property in the short term, even though emotionally I have the "never sell - always hold" in my mind...

Question 2 might be - what sort of percentage loss are most property investors with a buy/hold strategy willing to incur in a flat market? Or alternatively for a fully financed rental property for buy/hold what is the minimum rental yield most property developers would consider?

EDIT: Noting various mixed responses I added a poll to hopefully summarise...

 

[evand]

Is that 3% gross yield? If it is dump it and move on.

It is not a flat market, the overall trend is down. Especially in Brisbane and SE QLD.

Where is it?

 

[mixedup]

@evand - 3% rental yield being rent for year / property value. Property is 7km out from Brisbane CBD along major train line. Thanks for reply. What sort of yield would a buy/hold investor be looking for as a minimum (assuming they're buying at all at the moment)

 

[evand]

So thats gross. You cant keep taking such a big loss on the hope of future cap. gains. Thats not a recipe for successful investing.

As far as what investors expect min yield to be. Everyone's different. I wouldn't buy under 7% yield, but that's just me.

You seem pretty young with plenty of investing years ahead of you. I have sold before to avoid losses, you have plenty of time for more successful investing adventures. But if you hold onto this one it could affect your future results big time. Just my opinion.

@evand - 3% rental yield being rent for year / property value. Property is 7km out from Brisbane CBD along major train line. Thanks for reply. What sort of yield would a buy/hold investor be looking for as a minimum (assuming they're buying at all at the moment)

 

[redwing]

How long have you held the property and what was your initial plan when purchasing?

What is it worth with the DA already in and approved with council (that will most likely save an interested developer 6 months with an application also).

 

[mixedup]

@redwing - estimated value I gave was with DA approval/effect in mind (a sale would be focused towards developers)

 

[evand]

Problem is, in the current climate you'd have a hard time selling to developers, unless you almost gave it to them.

They would be offering peanuts at the moment.

 

[mixedup]

interesting - might be worth holding until things pick up a little - any ideas how the building cycle normally might align with the property cycle? In general would I really be just waiting for an improvement in the current housing market & the demand from builders would tend to roughly follow this?

 

[DavidMc]

I am in a very similar situation with one of my properties - ~680k ish, $420pw rent. It's in inner Melbourne.

Right now I am just waiting it out as I can afford to, although it's becoming a real drag - 5 years on. Up on value, but overall down 50k after I account for buying costs and neg CF.

One year of 10% growth will correct that, but not sure when that will come (and going backwards $18-20k each year on net CF).

For me, I decided if I can get a long term average of 5%+ CG it will do OK, and I do believe long term average will be this or higher, so I am staying in for now. It was a real knife edge decision. Horrible time to sell also. I will be watching this thread closely

 

[evand]

Resi property tends to stagnate or fall in price over along period of time. Then has big gains in a short period of time to compensate, which then usually overshoots.

So where we are now, i don't think property price is going anywhere for quite awhile. Especially after the huge gains of the last say 10-12 years.

I've seen 3 cycles of this stuff and i'd be selling.

 

[Belbo]

Don't listen to evand. He's just a bitter old Sydney coot with no love for Joh town. I reckon you're on the cusp of big things economically up there, MU, and a year or two more could really see Brisvegas pull ahead. The main thing is, no-one's crystal ball is perfect (except mine).

 

[Propertunity]

Resi property tends to stagnate or fall in price over along period of time. Then has big gains in a short period of time to compensate, which then usually overshoots.

^ ^ that's exactly right. In any 7-12 year cycle you can expect long flat periods. The big gains are probably in only 2-3 years of that cycle and can be 40-50% pa at times.

Your issue (and everybody else's really) is that you don't know when those periods of big gains will be. Additionally, there always seems to be a different reason for those gains in each full cycle.

The only thing you really know is, that if you sell, you will not be picking up any gains, period, full stop. BUT you have to have the cash to fund the holding period. Even so, 3-4% yields are pretty sucky to start with.

You may be better off, cutting your losses and buying something a bit more neutrally geared to hang onto, if current holding costs are impossible to bear.

 

[mixedup]

You may be better off, cutting your losses and buying something a bit more neutrally geared to hang onto, if current holding costs are impossible to bear.

Good point. For the sake of the question you could assume that if I sell I would re-buy another rental property with greater yield.

 

[scha9799]

Question need to ask yourself

1) is this investment hurting your lifestyle ? (become more of worry than enjoyement )

2) if question 1) is yes, then dump it .

3) if question 1) is no, then keep it.


End of the day, you can't enjoy your life because of your investment. what's the point ?

 

[mixedup]

@scha9799 - Answer to Q1 for myself is no. But at the yield/loss it is at I am now really questioning whether it really makes financial sense to continue to hold and hope the market goes soon back to >3.5% annual growth...can I ask what your thought process is around keeping it?

 

[scha9799]

many people invest for the sake of investing.

what investing really is to make our life more enjoyable.... for many people mean be able to leave their day job.

so if the investment property doesn't give you the enjoyment you deserve, then really need to ask yourself what's the point ?

the property you are holding may be suitable for some developer with deep pocket, but may not be suitable for you at this point in time.

I made the similar mistake before, and I realised that property investing is not only about the number but also about your enjoyment of life.


I hope this will help : )

Taylor

 

[Propertunity]

...can I ask what your thought process is around keeping it?

Without answering for scha9799, here's my 2c.

I see this a lot. Investors hang on and hang on biting their nails and wringing their hands for years holding some neg. geared property. Then they get to the end of their emotional rope and sell. 2 years later the price doubles.

The guy who sold declares he can never make any money in RE. The guy that bought and doubled his money in 2 years reckons he's a RE genius. They're both wrong.

 

[Belbo]

Enjoyment now, or later, Scha? Deferred gratification is the secret to financial success in life. Instant gratification is the route to government old age pension (assuming you live that long).

 

[scha9799]

the thought process to investing in property for me is similar to buying a shoes !


you need to find a suitable pair of shoes so that you can be comfortable walking toward your goal with hurting yourself or slow down your prograss.

you see, if a pair of pretty shoes but your feet can't fit into it. then you can't go for long.

same as property investment.

some people have a lot of spare cash and a lot of time, then they can afford to huge negative gearing property and wait for the long term capital gain.

some people only have little money, then negative gearing may not be a suitable property for them. they need to find a neutral of positive gearing property.

 

[Sunfish]

Mix, you are experiencing "draw down" and that is what you need to search on in the broader sense of investing. It is NOT something to be accepted routinely.

What you have looks toxic to me in this environment, but that's me.