Right time to sell?

[lucky_phil]

Well, we read buiding wealth through real estate, followed
most of it, now have 9 properties with over $1M equity.
But nothing lasts forever.
We are thinking of selling 4 (our first rentals) bought in outer
Southeast Melb, they have more than doubled in value, and we
would like some cash.
Other concerns are that the area is unlikely to increase as much again, and we may do better in Qld at the moment....

Any flaws in this reasoning? all comments welcome.

Thanks to Jan Somers, it really does work!

 

[see_change]

Phil

You will get different view points on this . Some people have the view point that you should never sell a good IP.

Personally I think to say that is narrow minded . Sure, you can get properties revalued and draw down the equity and in certain situations this is the way to go.

A lot depends on what you feel comfortable with. If you are going to have problems with sleeping at night , with an ever increasing amount of debt, maybe selling is a reasonable option for you.

If you have achieved a profit that you are happy with , and feel that there are places you can make better use of you money with , I don't see it as a problem..... but there are other people who disagree quite strongly and I'm sure we'll be hearing from them .


see change

 

[XBenX]

Id look at it this way...

Is asset a the best place for my money (dont forget opportunity costs)
.
Or is asset b a better place for my money.

Take into account both purchase and sale costs (including tax) and project 1,3,5 and 10 years - should give you a good basis for consideration.

 

[always_learning]

Originally posted by lucky_phil
Well, we read buiding wealth through real estate, followed
most of it, now have 9 properties with over $1M equity.
But nothing lasts forever.
We are thinking of selling 4 (our first rentals) bought in outer
Southeast Melb, they have more than doubled in value, and we
would like some cash.
Other concerns are that the area is unlikely to increase as much again, and we may do better in Qld at the moment....

Any flaws in this reasoning? all comments welcome.

Thanks to Jan Somers, it really does work!

9 IP's well done, you are one of the top 1% of property investors in australia.

I think there is a common perception (consensus of opinion) backed by some good economic data suggesting that property prices have increased above and beyond that expected by historical and current economic growth, ie prices today are consistent with expectations of prices in 5 years time. ie. we have probably experience most of the growth we can expect in the next 5 years. To expect the next 5 years to show the same growth as the last 5 years is not rational.

Naturally this is just general market conditions, in regard to specific properties and specific areas naturally oppotunities will exist.

Looking at your case. What happens when you sell

a) You pay the REA.
b) You pay captial gains taxes
c) You pay Legals
d) You pay accountants

What's left over is your profit....it will be considerable less than your equity! I guess you could loose 30% of your equity converting it to cash in the bank.

Equity is king, equity is capital. With equity you can do many things. So my basic question is "What do you want to do, and why having cash in the bank makes it possible in comparison to having lots of equity and means of accessing it (LOC)?"

So if your properties are not too negatively geared and placing a burden on you day-to-day expenses what is to gain by selling? Lets say they grow zero in the next 5 years, but are neutrally geared and you can use the equity in them to launch further investments, what is different to selling them ( ie by definition if you sell your expected returns on those assets become zero) and using the profits/cash to launch further investments?

The weak point to my suggestion is the fact that "What if prices decrease", history has not been written and nobody knows how this boom will end with a bang or a wimper.

Congradulations in having 9 IP's, I am doing the figures now and I should soon (at the conclusion of my current development project) reach the magical $1M in equity...ie should soon be a paper millionaire.

 

[see_change]

AL

"what if the prices decrease " is the weak point in the plan.

I'm not saying people should be selling now, ( I'm still buying ) but there will come a time where it may be appropriate to sell.

The way I look at it the moment, is that we've done pretty well out of the cycle up to this stage , financially and educationally. I now know how to make lots of money in a rising property market and if I could replay the last five years I could put myself in a position where I could be wealthy by most people standards.

I know that with the next cycle I can do that with the equity that I already have.

Given the strength of the current cycle I believe that there is a chance that the following slump may be larger that what many people expect. Unless I'm mistaken the price slump in shares was the greatest since the Great depression.

In the last slump , banks requested extra equity off people who had not missed payments . ( yep , there was no logic to it , but they did ......) . I'd guess they're more likely to want extra equity off people who are highly geared. I wouldn't want to be sitting on a pile of IP's in the middle of a slump when there are no buyers there. ( actually there will be at least one there......)

While prices go backwards at some stage in most case cycles, the worst case senario is that of deflation. This exists in one of our major trading partners, where property prices have gone backwards significantly.

Maybe it won't happen , maybe the sky won't fall in .. but it is a risk , and one of the important things about wealth creation , is minimising risk. That is one thing I learnt from share trading.

see change

 

[elwyn.d]

Hey Mate .......
Where are they and how much do you want for them ???
For what its worth I cant see much in the way of prices of properties going up in the next couple of years but I think we will start to see rental increases over that time.
Investors wont be comming into the property market like they have done over the last 2/3 years and prices have made buying more difficult for first home buyers especially. So we should see a swing back to much lower vacancy rates.
Should you sell? Not for the sake of it. But if you can keep the big picture in mind and have some fun on the way...what the hell.........
Regards and tell us what you do.. Elwyn.d

 

[brains]

Equity is not king - cash is king and as my granny says " no one ever went broke taking a profit" Put your teeth back in granny!

Having said that i reckon if you can achieve what you want without selling - dont sell . If you cant - by all means sell.

 

[always_learning]

I would always choose a larger amount of equity in something of real value ( like IP ) than a smaller amount of cash.

What I am saying is to think carefully before trading lets say $1M of equity into $700K of cash.

If cash is king...leave the $700K in the bank for 20 years and see how you go! In 20 years I wouldl choosethe IP's over a term deposit.

Cash is just a liquid form of capital ( the best form of liquid capital), I would stand by my statement that equity is king. Cash should be converted into high yeilding investments in the most effective way you can. Having equity in an excellent asset is normally very convertable into cash.

What see_change is saying I think must be considered as possible by all serious IP investors. The future history has not been written, capital losses could happen just as stagnation could happen, just as slower growth could happen. Not to consider the implications of each of these to your investments would be unwise. I believe that the risks see_change suggests are possible, I also believe that an effective strategy to reduce those risk should be in place such as holding assets (multiple) trusts, using more than one source of finance, keeping gearing at reasonable levels ( <70% ), maintaining a near neutral cash flow etc.

 

[lucky_phil]

Hi all,

First, thanks everyone for very thoughtful responses and shared
advice.

We would no way "cash-out" in full, although it does seem certain there could be some challenging times maintaining rental income if/when a slump happens....but compared to owning shares its no contest for us anyway.

But, per Jans writings, if: the property is well located, has
tenant appeal, etc, there will probably never be a shortage of
people who need to rent (we always used to have a quiet chuckle about our tenants new cars overseas holidays and such)

Also seem to remember the comment, not so much the timing you buy/sell in the market, as the length of time you are in the market.

BTW this forum is great, you have something very worthwhile
here, which is an excellent tool, multiple opinions and guidance of peers.

 

[Garry K]

Hi Lucky

Well done.

Your said

Originally posted by lucky_phil

Also seem to remember the comment, not so much the timing you buy/sell in the market, as the length of time you are in the market.
.

What is your take on this?

I'm assuming you've been in property for a while, so how important do you see market timing?

What's you view on the current Melbourne market?

If you were starting out again, would you be buying an IP anywhere in Melbourne at present? Assuming you could handle some initial neg cash flow, and where going to hold for say 10 years.


You are right about this forum. It works because people are prepared to share their ideas, recognise there is not just one correct answer, whilst respecting others posts.

Geeay

.

 

[brains]

I was repeating an often heard saying in business and investment circles that 'cash is king'.

You need to expand your view from purely property to appreciate what it means.

Why would he leave $700k in the bank for 20 years? thats just plain silly.....you might be surprised to know theres lots of other things to do with cash.

For one of hundreds of examples: I used to cash to start my business (the company still owes me the startup money btw) and the return on that cash investment has been in the thousnads of percent, not just in income but in the appreciation of the value of the buisness.

Im not talking about more equity versus less cash, thats like comparing apples and oranges.


While i love property and have done very well from it, i acknowlegdge its not the last word in investing and/or making money, to think so is a very narrow view and will limit your future success.

Originally posted by always_learning
I would always choose a larger amount of equity in something of real value ( like IP ) than a smaller amount of cash.

What I am saying is to think carefully before trading lets say $1M of equity into $700K of cash.

If cash is king...leave the $700K in the bank for 20 years and see how you go! In 20 years I wouldl choosethe IP's over a term deposit.

Cash is just a liquid form of capital ( the best form of liquid capital), I would stand by my statement that equity is king. Cash should be converted into high yeilding investments in the most effective way you can. Having equity in an excellent asset is normally very convertable into cash.

What see_change is saying I think must be considered as possible by all serious IP investors. The future history has not been written, capital losses could happen just as stagnation could happen, just as slower growth could happen. Not to consider the implications of each of these to your investments would be unwise. I believe that the risks see_change suggests are possible, I also believe that an effective strategy to reduce those risk should be in place such as holding assets (multiple) trusts, using more than one source of finance, keeping gearing at reasonable levels ( <70% ), maintaining a near neutral cash flow etc.

 

[always_learning]

...you might be surprised to know theres lots of other things to do with cash.

surprised? I would be more like

than this

My point is cash is just a medium of exchange, it's true value can only be measured by what you exchange it for! The great news is that we get to choose! With some self control, education and some effort we can choose to create wealth.

 

[jahn]

Always Learning
What is the criteria for the award - 1%
Is it the number or $ equity, or both?

"9 IP's well done, you are one of the top 1% of property investors in australia."

and
..."you might be surprised to know theres lots of other things to do with cash."
I've told a couple of people exactly where to put their cash. Does that count ?
Well done lucky_phil
"But nothing lasts forever." There seems to be statistics around that show that property has increased by an average of 10% per year over the last 50 years or more, so I plan to see the results of more than just the next slump/plateau/whatever, so will stay with IP investing.
jahn