Why do property investors sell?

[Sunstone]

Why do property investors sell?

In recent times there has been an increase in the total number of property investors.
However depending on which statistics you read between 78-92% of these investors will only ever buy one property and within 5 years one third of these will sell this sole investment property.

I see that the biggest reason for selling is a “Lack of patience” and getting “itchy feet” rather than a change in circumstances.

It comes back to a psychology test that is done on children. They are given a choice of being given one chocolate immediately or two chocolates if they agree to wait until they have first done a simple errand. The child who has the patience to first complete the errand has been proven to be a greater saver and hence receive greater financial rewards.

However not all property investors have the same levels of patience. Undoubtedly many will not experience the same levels of capital growth that they have had over the recent years leading to a possible inability to purchase more as quickly.

When this happens over a relatively short period of time they will get “bored” and will think about selling. Selling in order to “lock in profits” without fully thinking about the implications of what they are doing. They will try to come up with a list of reasons to logically “justify” selling when at the end of the day they shouldn’t. One reason may be to say that the funds invested should be put into a property in a “different” area or a “different” asset class. Once the action of selling takes place however there will be greater pressures on the $$$ realised and the danger that these dollars may not be re-invested at all.

For this reason whilst there has been a short-term increase in the number of property investors I see that over the next 5 years we will return to the long-term average % of property investors.

How patient are you?

Some interesting related reading on the patience of children:
http://www.ub.rug.nl/eldoc/dis/ppsw/a.l.w.gattig/c5.pdf

Cheers,

Sunstone.

 

[Jimmyjamjars]

Selling

If I wait a year before selling all of my investment properties, does that mean that, as well as getting a 50% relief on CGT, that the government will also give me extra chocolate for being patient ????
JIM

 

[jrc]

A willingness or preparedness to delay gratification is part of it. However, people have different motivations for buying property, or maybe were not clear in their motivation or expectation initially.

 

[handyandy]

It's not just itchy feet although I think it constitutes a large contributing factor but its also the problems that suddenly confront these new landlords.

The plumbng problems - new water heater, blocked sewer, broken pipe etc.

The tenant problems - tenants leave a mess, tenants leave damage, leave without paying all rent all up the landlord is out of pocket

Tax and accounting issues

Etc

A thousand and one other problems which suddenly become problems whereas before these folk only ever dealt with their own and immediate problems and are generally flat out even copeing with them.

I had an interesting discussion recently with such an ex landlord - 1 property, 2 tenants - the first left superficial damage and rent owing. He went along and fixed up property to rent out again. Second tenant did a real job on the place, holes in wall etc plus 6 weeks no rent, he fixed the place up again and sold it. Total time in the market 15 months. See's property as loosing money, will never touch it again.

As far as your question re 'How patient are you', well I have never sold a property and have now been investing since 1985 so I would say I am very patient and this patience has paid me back many times. I suspect that deep down I am just a collector and property happens to be what I collect

Cheers

 

[Kennethkohsg]

Why do property investors sell?

In recent times there has been an increase in the total number of property investors.
However depending on which statistics you read between 78-92% of these investors will only ever buy one property and within 5 years one third of these will sell this sole investment property.

I see that the biggest reason for selling is a “Lack of patience” and getting “itchy feet” rather than a change in circumstances.

It comes back to a psychology test that is done on children. They are given a choice of being given one chocolate immediately or two chocolates if they agree to wait until they have first done a simple errand. The child who has the patience to first complete the errand has been proven to be a greater saver and hence receive greater financial rewards.

However not all property investors have the same levels of patience. Undoubtedly many will not experience the same levels of capital growth that they have had over the recent years leading to a possible inability to purchase more as quickly.

When this happens over a relatively short period of time they will get “bored” and will think about selling. Selling in order to “lock in profits” without fully thinking about the implications of what they are doing. They will try to come up with a list of reasons to logically “justify” selling when at the end of the day they shouldn’t. One reason may be to say that the funds invested should be put into a property in a “different” area or a “different” asset class. Once the action of selling takes place however there will be greater pressures on the $$$ realised and the danger that these dollars may not be re-invested at all.

For this reason whilst there has been a short-term increase in the number of property investors I see that over the next 5 years we will return to the long-term average % of property investors.

How patient are you?

Some interesting related reading on the patience of children:
http://www.ub.rug.nl/eldoc/dis/ppsw/a.l.w.gattig/c5.pdf

Cheers,

Sunstone.

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Dear Sunstone,

1. My wife and I have just sold off 2 Goldcoast properties in late 2002 and August 2003 recently as we believe that the Goldcoast property market was peaking/ had already peaked then under the present property cycle. We've since then re-invested in 2 new properties in Perth and are planning to acquire 2 more pieces of vacant lands to build on in Perth.

2. Our own past experience with the Goldcoast property market has been such as we are able to acquire our second property in 1994, without any additional deposit required after acquiring the first property in 1993 in the last rising property market cycle situation. After that, the RBA increased the interest rate and our 2 properties went into a negative equity situation for about 6 years from 1994 till July 2001 when the houses manage to break even to its original purchase price.

3. Since the Goldcoast property market is cyclical and is of such nature, and that what we have experienced its highly volatile roller-coaster house price trend before, since this property cycle trend is likely to be repeated again in the near future in the Goldcoast market, it makes sense to us to cash out on our 2 properties to re-invest eslewhere and to re-position ourselves again in 2009/2010, in time to be ready for the next property cycle upturn/peaking trend.

4. We used to subscribe to the "Buy and Hold" strategy, as advocated by Jan Somers. However, we have found that this strategy pre-supposes that the property investors are able to hold on to the same property without any problems over a long term period which may not be easily acheiveable by some property investors, including ourselves. Morever, holding on to same properties in a declining market scenario is a highly risky proposal although we also understand that big monies can only be made only in the long run only if we allow the TIME leverage factor to develop itself fully and to exponetially increase the house values after a certain minimum holding period of time.

5. As such, we are modifying our basic "Buy and Hold" investment strategy into the "Buy-Hold and Sell at Market Peaks after 10/20 years holding period"
and for every 2 properties owned, we will try to hold on to one for long term investment purposes and to cash out the second one for immediate cashflow reasons to re-invest and support our daily living in the mean time.

6. Unlike the Goldcoast property market, the property cycle in Perth is different. It is of shorter duration and less volatile;- once every 5 years and in the Perth property market, the median house prices merely plateau off and seldom fall below its last market peak as its past market trends have shown. Consequently, we are planning to hold onto our Perth properties long term including this coming short(1-2 years) property cycle downturn period and are planning to acquire 2 more properties to add on to our existing investment portfolio while we patiently await the Goldcoast property market to "unwind" itself over the next few years to its long term sustainable price trend, just as what we are now witnessing in the Melbourne and Sydney property markets.

7. Thus, to us, the real challenge is not really how patient we are as a property investor, but how to safely flow and ride on the "ups and downs" trends of each and the existing property cycle/market trends in the various specific property markets, so as to create sufficient wealth for our own retirement purposes.

regards,
Kenneth KOH

 

[Kennethkohsg]

Dear Sunstone,

We further wish to add that what the investment profits which we manage to make through investing in our last 2 properties in the Goldcoast market over a 9 years period, we are able to pick up such hefty price gains in the Perth property market within a one year period in 2003.

 

[Tibor]

Hi Ken,

Just out of interest, have you calculated ho wmuch money you are loosing by selling the properties? It might sound strange, but you will incur the following expenses (and that money has gone forever)

1) Agent commission (except if you sell it yourself) lets say 2.5% of your selling price

2) Solicitors fee (lets say $600 per property)

3) Financial institution (tons of fees) to close your business with them and to release the mortgage (let say $500)

4) Your biggest one comes here, CGT. Under the latest rules you may either pay up to 25% of the (selling price less purchase price plus write-off value)
or if you purchased before 2000 (or whenever the latest rules were introduced) you can use either this method or the CPI index method.

In exchange, if you sell less than being 5 years in the market, you can now recoup certain expenses like whatever left from finance (maybe Stamp Duty), etc.

Anyway, at the end of the day you pay lots of money (everyone who makes a quid will love you) and have your asset gone (assuming you did not sell your negatively geared liability but sold a real income producing asset), together with the income.

Now you have the cash and you move it into another market.

Then you will pay Stamp Duty, Legal fees, Financing cost, Building and pest inspections reports, depreciation reports and might even have to spend some money to make your new property letable.

Whats interesting, that I've heard property gurus whom after a couple of years have changed their strategy from something similar to yours (maybe fencied it with some renovations) to buy and sell only if you bought a lemon.

It is obviosuly your and your wife's decision, but my gut feeling and experience says to me that in the long term Handyandy might be a bit (as a matter of fact quite a bit) better off as he is not culling / sharing his wealth with the parties mentioned.

 

[Cosmo]

Property investment (buy and hold) is all about delayed gratification. And most people generally have a real problem with that.
I notice all my sister-in-laws who, courtesy of my brothers, now own multi million dollar property portfolios. These girls come from spender backgrounds (unlike my brothers) and now the wives are battling with their husbands on how they should live the supposed lifestyle of the rich. Problem is the wealth is tied up in the equity of these properties. Some people can’t see this situation clearly. They believe “we are millionaires now lets live like it”.

I hear a lot of excuses like “you only live once” “you’re going to be too old and sick to make any real use of your wealth in retirement.”

Sometimes the pressure can come from within the family to sell, extend LOC’S etc. I’m watching it happen right now in my extended family.

 

[perky29]

To me it comes down to this - I have bad debt (Mortgage on PPOR) which I would love to clear ; or do I keep the properties and get positive cashflow of around 5k per year?
It is actually a difficult situation - as that positive cashflow offsets the negative gearing property I have.
Probably sell one which makes about $1500 per year positive cashflow and pay off most of the bad debt (and have less than 50k owing) feels like the right decision - especially when this townhouse which was bought 11 years ago for 130k (which was worth about 100k two years ago and which I owe 101k on now) - is worth over 200k now (and BTW is in the Gold Coast).

 

[DAAJ]

This is a great subject and one very difficult to answer either way.
It all depends on your circumstances such as family ,single,debt ratio,tax and to many other reasons to name here.
But if you could break it down it might look something like this -

Pay of PPOR first buy investment properties (5), sell one in next boom buy big boat and then pay tax.
Then buy 2 more IP's sell an other one buy new car and holidayand then pay tax
Buy more Ips,s sell one (Probably 2) put kids through uni and buy your wife a large diamond and then pay tax.

Or dont sell anything keep buying more buy and hold for ten to fifteen years retire early on passive income and avoid tax and watch your fellow workers work till 60,65,70,75?

Or take a risk(single people)buy IP's sell at profit borrow large amount for more ip's become rich

Yes as you can see this is definatly a hard question to answer and if i could get a hold of ten millionaires whom have become wealthy through Property investing i would love to know thier secret.

Good luck people
Dom

 

[Kennethkohsg]

Dear Tibor,

1. I've no doubt that if we are able to hold the 2 Goldcoast properties long term successfully over to the next property cycle, we will make more capital gains in future. In the meantime, we must have the strength to out-last the present property cycle correction over the next 5-7 years when the price is on the decline. The last experience we have, is not pleasant experience and we consider it as a high risky proposal whereby our funds could have been better deployed eslewhere in the mean time for the next 5-7 years until the next property cycle is in its upswing/peaking stage again.

2. That is why we are re-investing in Perth instead and are presently planning to further increase our property portfolio to 4 in 2004-2005 period.

3. We have accumulated sufficient tax losses to offset/minimise our CGT liabilities from the sale of our 2 Goldcoast properties. We agree with you that the likely CGT expense is likely to be a biggest costs when it is not properly managed.

4. |As for RE agent sale commissions, we will try to sell the properties by ourselves in future so as to minimise the costs incurred.

5. As for conveyancing fees, we think it is inevitable if the sale is to be carried out in Queensland. It is better to be safe than to be sorry in executing the property sale for a profit. In Perth, we can further reduce this conveyancing fees through the use of settlement agent service, although we still adhere to the "play safe" principle for our future property sales.

6. Realising and cashing out on our profits from our earlier property investments and with ready cashflow in our own pockets through the sale of our 2 Goldcoast properties are important to us, in that we have successfully established a successful property investing track record for ourselves and make our future loan applications easier for acceptance by the lending banks as we are deemed to be "lower risk" clients as compared to other new novice property investors. Ready cash in our pockets also gives us the reassurance and power to choose and decide on our various investment/life options. It further allows us to have this positive experience and confirmation that offshore investing in the Australian residential property markets from Singapore, is indeed, safe, profitable and financially rewarding, despite some not so positive experiences reported by the older Singaporeans.

7. Like we say earlier, we will "buy and hold" long turn, one investment property for every 2 properties invested, given the prevailing market trends/conditions as we sincerely believe that holding onto the well-performing properties is indeed the proper way of wealth creation through property investments. In the meantime, cashing out on our second investment property at every property cycle peak once every 5/10 years will allow us sufficient cashflow to re-invest in more properties and to continue to effectively fund our comfortable lifestyle in the meantime as we age graciously towards our retirement in future.

regards,
Kenneth KOH

 

[simonjulie]

Sunstone
Great post!
Two chocolates are better than one and IMHO worth waiting for.

Well done Handyandy - I'm a collector too.

I am very patient and this patience has paid me back many times. I suspect that deep down I am just a collector and property happens to be what I collect

Tibor - there is certainly food for thought here for those thinking of selling

in the long term Handyandy might be a bit (as a matter of fact quite a bit) better off as he is not culling / sharing his wealth with the parties mentioned

Cosmo - get your sisters-in-law to read "The Millionaire Next Door" - the reality is that most Millionaire wives are in fact quite frugal - which is a big part of the reason that they (and their husbands) reached millionaire status in the first place.

how they should live the supposed lifestyle of the rich.

Julie
Audentes Fortuna Juvat
Fortune favours the bold

 

[Kennethkohsg]

Dear Sunstone,

1. If you look at the present property situation in Japan, HK, Malaysia and Singapore, whereby the property prices had dropped by more than 40%-80% off their last price peak, it is natural and logical to understand why property investors will have to sell off their properties and cash out on their realised profits from time to time, generally speaking.

2. I wish property investing is a simple and "risk-free' as "delaying our needs gratifications" to our later retirement years, as you seem to suggest.

3. Will the Australian property prices continue to grow upwards indefinitely into the forseeable future as to what it has done before, nobody can tell for sure;- although it is likely to do so in future if the Australian property markets/economy remains properly managed!

4. A repeat of the high interest rate in the Australian economy context, similar to the 1989 Australian property market situation or the recent threatened removal of the negative gearing tax incentives for property investments in Australia cannot be effectively ruled out in future. Thus, investing in properties through the basic "Buy and Hold" strategies has its own inherent risks, which needs to be properly understood and managed accordingly, given the constant changing circumstances.

5. Is the future Australian property market situation unlikely to follow those highly volatile markets trends in Japan, HK, Malaysia and Singapore in future? Nobody can tell for sure that it is unlikely to be so in the forseeable future! However, I must credit your present Australian Govt for acting wisely and timely in managing the recent emerging housing bubble in Australia down for a soft landing, and without major housing bust as is widely predicted by the Economist magazine.

6. In the heydays of the Singapore property market from 1993-1996/early 1997, my own S$100,000 5-room HDB flat has grown tremendously to S$530,000 when I cashed it out in Feb 1997, achieving more than 500% capital gains/growth;- some 5 months before the occurrence of the Asian Financial Crisis. 6 years after my house sale and in 2004 today, the same HDB flat is still valued at less S$410,000 and many of the property owners in Singapore are suffering from huge negative house equity till today. I am not even sure whether the same flat will ever recover to its last sale price peak in early 1997. Despite this, I still consider that situation in Singapore a much "better-off" scenario as it has suffered about 40% price loss today as it bottoms out as compared to the current property market situation in HK (60% median house price loss) and Japan (more than 80%median house price loss).

7. Thus, given my own home/investing experience, it is natural and logical for property investors to sell off their properties from time to time.

8. Despite this, I still agree that the basic "buy and hold" investment strategy is the right way to long term wealth creation especially in today's Australian property market situation/trends for a forseeable period of time until the baby-boomer generation fades away after their retirement, then some new basic fundamental market changes in the Australian property market are likely to occur then which we must learn to anticipate and manage the emerging new changes/risks accordingly.


regards,
Kenneth KOH

 

[simonjulie]

Hi Kenneth KOH
I wonder if the Asian property bubble burst was due to overcapitalisation of assets against the true value of the land on which they were built.
Assuming that supply and demand is the key to factor contributing to the growth of any property bubble. Did the bubble burst because most investors lost site of the fundamentals(true land value) and allowed other agendas such as greed dominate their investment decisions?
IMHO a wise investor only goes where the numbers work now not where they think they might work in the future.
The two assets worth owning are time and land. If that is achieved to a comfortable degree the rest comes more easily.
Kind regards
Simon

 

[Mr Ed]

Why do property investors sell?

This cycle you could have dropped your wallet anywhere in Australia and made a large capital gain. Some of those newbie investors who got lucky I think will sell for any number of reasons, some being…

Like to increase their lifestyle
Divorce
Cashflow problems @ home from negative gearing / poor structuring
Tenant problems
Peer group pressure
A perceived sense of success
Hassles that come with property R&M etc
Upgrade their PPOR from IP sale proceeds
Not trendy any more
Vacancy periods
Reward themselves with “Do Dads” for all their years of hard work in the job.

A Realtor would be the best person on this question.

Mr Ed

 

[Aceyducey]

My thoughts, probably nowhere near all the reasons people do the things they do

Negative Future Expectations
- Expectations that that the future will be worst than the past. It's quite a common feeling, particularly when things slow down. (Things were much better in the good old days...)

Investment Timeframe
- Not everyone wants to wait 10 or 20 years to make any money - some people may be dead by then

Changed circumstances
- Divorce/Marriage/Death/Unemployment. Never forget that while the unemployment rate is low, more than 1 in 20 people claiming to be seeking work haven't gotten a job....and not all of this is transient, few months unemployed. Some people lose a job due to disability, bereavement, or other factors which may necessitate a long time between drinks. And with Marriage, often both parties bring a property to the relationship...only after marriage do they decide to sell one...so for a brief time they're investors

Different Metrics
- Not everyone things of property as a long-term hold asset. Some people are quite happy to get in & get out because of their frame of reference & the metrics they apply to the investment. In fact, not all property investors even see themselves as property investors! (we held onto it because we couldn't sell it quickly when prices dropped, we didn't need to sell it once we got a tenant in, so we just figured we'd hold onto it in case the kids ever wanted to live there)

Consolidation
- Pay down debt across portfolio in preparation for the future - either further portfolio expansion or gainful retirement. Also useful for Future-proofing

Hot Lemon
- Even experienced investors buy lemons....what better time to clean out the basement than at the top of the property boom...Pass the lemon before it gets hot!

Experience
- Depressions children & 80s home owners know how volatile prices can be. They have experienced tumultuous times & don't even know if they've experienced the worst possible conditions - things could get even worse in the future. This experience shapes a lot of peoples' thinking....I fully expect the Japanese people to have their share of it over the next 40-60 years as well.

Just Because
- Woke up one morning, decided to sell the place that gives the most trouble/nags thoughts/want a few bucks/etc. Who really needs a reason - only psychiatrists & economists!

Cheers,

Aceyducey

 

[simonjulie]

Aceyducey

Investment timeframe - Not everyone wants to wait 10 or 20 years to make any money - some people may be dead by then

Do you think this is why a clever few make their money out of the more impatient investors - and they'll do it much quicker than 10 or 20 years!!

I'm still a fan of 2 chocolates are better than one.

Julie
Audentes Fortuna Juvat

 

[Kennethkohsg]

Dear SimonJulie,

Honestly, I do not really know the true answer;- though in certain ways, I can agree with you too that the houses/assets were "over- captialised" to a certain extent and that human greed cannot be ruled out as another related factor. However, it is more likely due the world's investment monies cashflow movements and "artificially-created" market demand and false sentiments regarding the extent of "land scarcity" in these countries and their "artificially-inflated" land/assets values which the Govt of these countries have allowed it to happen in the first place, thereby allowing unrealistic housing bubble to build up continuously until they burst when the foreign funds began to pull out en mass from these Asian countries during the Asian Financial Crisis in July 1997.

To me, today, Australia is a much blessed place to live in, with a good goverence and attracting the right immigrants and worldwide investment monies to its shores. However, who knows what hold the future? Will what is happening in Asia repeats itself in Australia in future? What do you say?


regards,
Kenneth KOH

regards,
Kenneth KOH

 

[Sunfish]

You missed one Acey. D. I. V. O. R. C. E.

 

[agent 86]

You missed one Acey. D. I. V. O. R. C. E.

Changed circumstances
- Divorce/Marriage/Death/Unemployment. Never forget that while the unemployment rate is low, more than 1 in 20 people claiming to be seeking work haven't gotten a job....and not all of this is transient, few months unemployed. Some people lose a job due to disability, bereavement, or other factors which may necessitate a long time between drinks. And with Marriage, often both parties bring a property to the relationship...only after marriage do they decide to sell one...so for a brief time they're investors