Why do property investors sell?

[Peter 14.7]

Strategy: risk versus return

Hi All

From the replies it seems the "never sell" theory gets a lot of support and anyone who does sell is a little "weird". I'd like to put a case for when selling is right from personal situation.

Scenario: I sold in July 2003 and made $210k. Why? CGT and COSTS you say??? Let us examine:

DOWNSIDE:

1. COSTS
I will hand the ATO tax of $40k and lost $12k in selling fees so I am $52k poorer.

2. LOCATION
I sold freehold terrace in Surry Hills NSW, which is hard to get and in short supply. May not be able to buy again?

THERFORE Am I silly?

Yes………. if I plan to drink, eat, waste the gain (unless I am about to die) for no benefit.

No ………if I have a strategy for using the gain.

UPSIDE:

1. REDUCED DEBT
I am saving $1k a month for another 20 years so a total of $240k in PPOR interest & principal. Totally dead money. Plus no fear of rate rises.

Considering I have to earn $2k to get $1k I break even on the costs I lost by end of year two. After that is it all profit.

2. BUILD FUNDS FOR NEXT INVESTMENT
So I also have $1k a month I use to give to Bank I can now save/invest for other purposes?

3. SEVICABILITY
I have been able to help my family financially and LVR is down to 10%.

4. RISK: Repairs
IP I sold had no protection to termites and had been attacked before. Very expensive to provide protection and no guarantee it would work.

5. RISK: legal

IP bought as 90% by me before I formed my own company as director and therefore if company get sued, IP at risk.

6. TAX PLANNING
Because of lower cost of living I don’t need to pay myself income and can retain in company and pay rate lower tax in 2004/05 year or handover as super.

So, as you can see, with a strategy selling is not always wrong, and in my case, very right.

Lastly, and this bit I planned for but cannot claim to have controlled….

Market has dropped as I predicted with rate rises. I am now cashed up waiting (hopefully) for more rises to take the prices down further so I can start buying IPs in trust structure. Safe, Tax Effective and all Deductible Debt.

Regards

Peter 147

 

[simonjulie]

Kenneth

What do I think? Could it happen in Australia? Anything is possible.

Being open-minded, flexible and resourceful helps an investor to survive in any market - go with the flow of change rather than swim against the tide - if real estate drops then look for opportunities elsewhere - there is no such thing as no opportunity - just a lack of imagination.

Julie

As someone on this forum has said

When there's a gold rush - start selling shovels

 

[Aceyducey]

Sell or hold - whatever works for you

The best thing about this discussion is that there's no one right answer (though there's undoubtably some wrong ones).

Whether you hold or sell, I'd say that a case can be made for getting to financial freedom in roughly the same timeframe.

The only thing I'd say about selling is that it's slightly more work & requires slightly more nouse...you've got to time the market a little

Buy & hold is close to (not absolutely) foolproof....though there are some very ingenious fools out there.

Cheers,

Aceyducey

 

[Gee Cee]

Cashed Out

I do believe in Taking the money & running. (The hardest part is estimating the time the gun should go off).

OK we could all sit there for 40 yrs . And yes we will make a good profit & finally have the $$$.

However i believe it is nice to make some $$. Have those $$ for your lifestyle NOW but also keep learning and moving forward.

(Sort of get some Balance)

You can never pick the exact highs & lows. But you can always average along. Have enough$$ to do the simple things in life. But also keep a constant track on the big picture of the market. This is where you make the $$ that allow you a lifestyle. (& it does not come from following the herd)?!!

 

[Pete]

I'm a "two chocolates later" & "never sell" property person, but can understand that sometimes investments are best cashed in and replaced by better ones. If it can be done with a gain rather than a loss, even better.

The value is in learning when it is right to do so, learning what investments are better/worse than others, getting it right/better next time.

I guess the old basics come-in to play - goals/strategy, plans, actions, monitor & correct, keep going (in the right direction!).

 

[geoffw]

What I've sold are the properties which have realised some gain- however, not a lot of gain.

The ones with good gain I'm keeping- even though I could be substantiallt closer to retirement if I sold those ones. They're the ones which have got a better chance of doing well in the future.

 

[Mr Ed]

If no one sold their investments we wouldn’t have OTP’s / species / People that are financially desperate / divorced or deceased. They are all valid reasons to sell.
They give us others opportunities. They all sell for their own reasons that only they can justify.

It all makes the world go around and stimulates the economy.

You can justify anything in this world if you want to. And selling an IP is probably one of the easiest justifications.

Why do some sell.

Beyond the best of us here.

Mr Ed

 

[Mr Ed]

Kennethkohsg wrote,

“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.”

I read this with interest and wonder whether our Govt really can take any credit. The market was already softening (Canberra anyway). A live example for you…

Belconnen district (major part of the ACT) approx population 100 000 one of the last areas here to boom so to speak.

Aug 2003 95 listings

Nov 2003 349 listings

In a space of 3 months had an increase of 367% in listings

The ole rule of supply and demand took over. It was rather ironical that at the same time the Reserve Bank increased rates saying they would like to slow down the property market.

Personally I don’t think we are in for a crash, why because we have only caught up to where property prices should have been anyway. Canberra that is.

We’ve had many years of nil to slow growth, (’95 – ’98) the last few years have been strong but that I believe is catch-up.

The market is now finally balanced, but heaven forbid would we like to see an Asian market here like you write about. There would be many a reason to sell if that was a typical cycle.

Mr Ed

 

[Peter 14.7]

The best thing about this discussion is that there's no one right answer (though there's undoubtably some wrong ones).

The only thing I'd say about selling is that it's slightly more work & requires slightly more nouse...you've got to time the market a little

Acey

Insightful comment!

I never realised that it is a lot easier to know when to buy than when to sell.

Is "buy and hold" an version for some investors of "buy and do little for fear of losing what you have got"?

Regards, Peter 147

 

[Peter 14.7]

Kennethkohsg wrote,

“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.”

I read this with interest and wonder whether our Govt really can take any credit. The market was already softening (Canberra anyway). A live example for you…

Belconnen district (major part of the ACT) approx population 100 000 one of the last areas here to boom so to speak.

Aug 2003 95 listings

Nov 2003 349 listings

In a space of 3 months had an increase of 367% in listings

The ole rule of supply and demand took over. It was rather ironical that at the same time the Reserve Bank increased rates saying they would like to slow down the property market.

Personally I don’t think we are in for a crash, why because we have only caught up to where property prices should have been anyway. Canberra that is.

Mr Ed

Hi Mr Ed

I do believe Gov (read RBA) can take some credit for so far soft landing. I dont know Canberra but before rate rises, in Sydney, IP Investors were like watching a shark feeding frenzy.

I will never forget walking into a packed "showroom" (read funky, minimalise sales office) and seeing every man, woman and almost the dog, frantically putting stickers on a plan for new apartments being released in Surry Hills on the old Hospital Site.

After collering a "sales agent"(read backpacker) they could not answer any questions I put re: BC fees, zoning, completion dates, you name it. After making them look foolish the Sales Director ( no-ones a manager anymore in sydney it seems) turned his nose up at me and muttered something words to the effect "I was a fool not to get in now! stop asking questions". I walked out in disgust after stating I owned two terraces round the corner so I must be one lucky fool .

The site is question in now undercontruction in the present market and I pity those who did buy! No-one to rent and no doubt Cr*p quality again.

The RBA has helped to stop this mania so credit is due.

Regarding you comments re no crash can you elaborate why? Are rentals rising in Canberra or are they already reasonable above cash rates. If capital values are to stay flat and you can get 5% plus no risk from a bank can you get 5% or better clear from rents?

Regards, Peter 147

 

[Sunfish]

Back to Sunstone's original post where he said "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." and wondered why.

Why not? Not everone who plays golf or lawn bowls becomes a paid up member. I think there must be a lot of luck involved with the first property and the first TENANT. Physologically many just don't like being a landlord.

eg My cousin bought a new four bed w/ensuite and thought he did well leasing to Korea Zinc. Trouble was that Koreans lived in it and were crappy, problem tenants. He sold within 2 yrs I think and missed the best of the boom. A mate of mine owned many houses and considered them hard work so sold them to retire. Another millionaire mate of mine with a midas touch has almost accidentally bought a few properties lately (other than his home and commercial w/house) but never planned to own rental property. He is helping out kids, planning for retirement etc. He will sell redundant property. And will be a richer millionaire. (I'm looking at his w/house)

Thommo

 

[Kennethkohsg]

Why do Property Investors Sell

Kenneth

What do I think? Could it happen in Australia? Anything is possible.

Being open-minded, flexible and resourceful helps an investor to survive in any market - go with the flow of change rather than swim against the tide - if real estate drops then look for opportunities elsewhere - there is no such thing as no opportunity - just a lack of imagination.

Julie

As someone on this forum has said

******************************************************

Dear SimonJulie,

I'm in full agreement with you.

However, my present position is that while I am likely to hold onto most of my Perth properties long term being in a slow and steady property Perth marekt, I am also more likely to sell off many of my future investment properties in the volatile Goldcoast property markets in the medium term in future;- at the peak of each of their property cycle and re-deploy my investment funds eslewhere while the Goldcoast property market is undergoing its correction over the next 5-7 years... unless the fundamentals of the Goldcoast property market has changed significantly.

The issue which I am presently concerned with, is not lack of investment opportunities in Australia, but one of the level of acceptable risks and proper optimisation of the use of the investment funds and the best way to achieve maximise the time leverage.

I will still sell off some of my future investment properties at the peak of each property cycle in the Goldcoast property market, to reduce the risks, cash out the profits to improve available ready cashflow and reduce debt in a declining market and to re-position myself with ready cash to await other investment opportunties coming by my way in the near future. To me, holding too much debt with too little cashflow to service the housing loans through a bigger and highly-geared property portfolio in a declining market is much more riskier as compared to holding a smaller and lower-geared property portfolio, with reduced borrowings/debts, improved cashflow in the prolonged property downturn period of 5-7 years duration. In this way, I can thus, stay more nimble and flexible in my investment with the same amount of investment funds within the same time period.

For your further comments where neccessary,please
Thank you.

regards,
Kenneth KOH

 

[Kennethkohsg]

I do believe in Taking the money & running. (The hardest part is estimating the time the gun should go off).

OK we could all sit there for 40 yrs . And yes we will make a good profit & finally have the $$$.

However i believe it is nice to make some $$. Have those $$ for your lifestyle NOW but also keep learning and moving forward.

(Sort of get some Balance)

You can never pick the exact highs & lows. But you can always average along. Have enough$$ to do the simple things in life. But also keep a constant track on the big picture of the market. This is where you make the $$ that allow you a lifestyle. (& it does not come from following the herd)?!!

************************************************
Dear Gee Cee,

I fully agree with you.

regards,
Kenneth KOH

 

[Sunstone]

Dear guys,

Thanks for some of the kind words.

I am certainly one who favours "Two Chocolates".


Dear Ken,

To me, holding too much debt with too little cashflow to service the housing loans through a bigger and highly-geared property portfolio in a declining market is much more riskier as compared to holding a smaller and lower-geared property portfolio, with reduced borrowings/debts, improved cashflow in the prolonged property downturn period of 5-7 years duration.

I ask the question was it your strategy to continue to purchase when it was apparent the impact that this would have on your cashflow and SANF (Sleep at night factor)?

All of us regularly go through stages of wishing to purchase more. At times we should not.

Recently I had to make a significant decision. I put contracts on two properties beside each other. One a 3,081m2 and the other a 2,997m2 medium density zoning opposite a shopping centre. (Properties that had not been on the market in the last 30++ years.)

It was possible to purchase and hold both of these properties but in doing so it would have meant a reduction in working capital for my other current developments and also would have produced significant negative cashflow. I made the decision to let the smaller/inferior block go.

A comparision to this is when you catch two huge fish in the same net. You can catch them and bring them in............... But in doing so you will your net break?

(What happened to the 2,997m2 property that was let go? It was purchased within two days after I let it go by another developer bringing additional development dollars in and indirectly producing a better result. His purchase price directly increased the value of the 3,081m2 one.)

I am very much one who buy's and hold's and develop's and holds.

Sometimes you need to go back to your real business plan and think about where you are going.

This is not just a one-two year plan. Planning with foresight can remove potential problems. If one tries to rely on "Crystal Ball" hypothesis's in selling then they give up control to another party. This party is not something we can control....... The time they purchase......... The price they pay....... Only by holding without overextending are you firmly in control.

Maybe it's time to revisit your long-term business plan?

Cheers,

Sunstone.

 

[simonjulie]

Good stuff Sunstone.
I think that the most important factor in this argument is to "Keep Moving". Staying active is so important whether it be selling to place yourself in a better position or holding on and studying the risk and preparing safety nets.
Each individual investor can only do what they know works for them.
I have traded in the past and am not ruling it out for the future however I want two chocolates at the end of the day.
Kind regards
Simon

 

[Gee Cee]

We ALL Want our Cake & to eat it twice!!

At the end of the day . WHAT DO WE ALL WANT?

My feelings.

To be healthy, Active, Happy.

Have a reason to get out of bed.

But to move forward in areas that we choose.

Wheather it be sport, arts, work or investment is REALLY a personal thing.

HOWEVER with the amount of information and friendly interaction here. We can ALL certainly head in the right direction regarding our investments.

A facility that could only have been dreamed of in the 70's.


We should all think our selves Lucky.



Gee Cee

(The 40 yr OLD FART)

 

[Kennethkohsg]

Dear guys,

Thanks for some of the kind words.

I am certainly one who favours "Two Chocolates".


Dear Ken,



I ask the question was it your strategy to continue to purchase when it was apparent the impact that this would have on your cashflow and SANF (Sleep at night factor)?

All of us regularly go through stages of wishing to purchase more. At times we should not.

Recently I had to make a significant decision. I put contracts on two properties beside each other. One a 3,081m2 and the other a 2,997m2 medium density zoning opposite a shopping centre. (Properties that had not been on the market in the last 30++ years.)

It was possible to purchase and hold both of these properties but in doing so it would have meant a reduction in working capital for my other current developments and also would have produced significant negative cashflow. I made the decision to let the smaller/inferior block go.

A comparision to this is when you catch two huge fish in the same net. You can catch them and bring them in............... But in doing so you will your net break?

(What happened to the 2,997m2 property that was let go? It was purchased within two days after I let it go by another developer bringing additional development dollars in and indirectly producing a better result. His purchase price directly increased the value of the 3,081m2 one.)

I am very much one who buy's and hold's and develop's and holds.

Sometimes you need to go back to your real business plan and think about where you are going.

This is not just a one-two year plan. Planning with foresight can remove potential problems. If one tries to rely on "Crystal Ball" hypothesis's in selling then they give up control to another party. This party is not something we can control....... The time they purchase......... The price they pay....... Only by holding without overextending are you firmly in control.

Maybe it's time to revisit your long-term business plan?

Cheers,

Sunstone.

**************************************************8
Dear Sunstone,

1. Thank you for your concern and form sharing with us your successful experience. Please accept my congratulations on your acheivement.

2. As to your question, no. It is not my strategy to deliberately "over-invest" with limited cashflow. It's highly risky and dangerous to do so.
Having said this, however, I do acknowledge that the temptation to do so is always there and therefore we need to be constantly clear ourselves with what we are doing and to be well-disciplined in our property investing if we are to succeed in this line.

3. In fact, the main reason why I sold off my 2 Goldcoast properties recently at the market peak/near peak is exactly to be prudent and sleep better with SANF, by reducing my investment risks as I am anticipating a prolonged declining/stagnant Goldcoast property market to occur soon, improving my cashflow and reducing my debt level accordingly. This is as per our own research and past investing experience of going through the last property cycle in the Goldcoast property market from 1993 till 2003.

4. Consequently, my own research has also showed that the median house price in the Perth property market is still undervalued, that the price increase is slow and steady and will merely plateau off during a property down cycle. Thus, I am able to sleep well too holding onto my 2 Perth properties long term without wanting to selling them away at the last market peak and continue to stay invested in this Perth market.

5. I fully agree with your property investing strategy and look forward to continually learn from you and from the other gurus in this forum.

6. Thank you.

regards,
Kenneth KOH

 

[Sunstone]

Dear Ken,

Thankyou for the kind words.

Whilst I may not agree with your strategy I respect your need to "Increase your SANF". At the end of the day there is more than one way to be successful in property.

Enjoy the journey.

Cheers,

Sunstone.

 

[Kennethkohsg]

Why do property investors sell

Dear Ken,

Thankyou for the kind words.

Whilst I may not agree with your strategy I respect your need to "Increase your SANF". At the end of the day there is more than one way to be successful in property.

Enjoy the journey.

Cheers,

Sunstone.

************************************8

Dear Sunstone,

1. Thank you for your kind words and feedback.

2. For my own self-education sake, may I know which part of my strategy is not agreeable to you and why?

3. Looking forward to your kind guidance and learning from you again for my own self-education.

4. Thank you.

regards,
Kenneth KOH

 

[Sunstone]

Dear Ken,

Quite simply I disagree with the selling part - as per the very reason for why I started this thread. Tibor has already given productive comments on the costs involved in chopping and changing. Handyandy………….. Have a search on his net worth and look at some of the pictures of his unit blocks. His buy from 1985 and never sell strategy……… flawed? …….. I say Handyandy has impressive patience and still comes across as humble and down to earth. A good example of the many “Ordinary Millionaires” that we have on the forum!

In reviewing why you sold the Gold Coast properties.

It appears amongst your biggest concerns was a) the risk involved with the low yields you were getting, b) your perception of a volatile market and c) fear of property value going down.

1) Yields

Yields can always be increased on properties provided they are not just a single unit in complex.

To do this:

*Upgrade existing houses.
-Have a plan to install/upgrade your property to increase tenant amenity and make it more appealing than other potential rental choices (On a $$$ vs benefit comparison.).

Whenever a lease comes up I do upgrades at the same time as I increase the rent. This means that the tenant feels that they are getting some value for the rental increase. I also ensure that I get in excess of a 20-25%++ ROI for the outlay.

By doing these upgrades it means:
-Rental yield has been increased.
-Property value has been increased.
-Total depreciation dollars have been increased.
-Better quality tenant can be attracted.
-More easy to attract another tenant in the future if tenant changes (Superior property to others in the area.)

*Partial Redevelopment
Look at ways that you can add additional revenue streams to the property. If you use one of my checklists then this would be one factor that you would consider when on each new property purchase.

-Dual occupancy potential? (Highset/existing granny flat or raise it?)
-Boarding house (University or Hospital in the area)?
-Subdividable block?
-Subdividable using a community title (Lower sqm requirements)?
-Billboard?
-Mobile phone tower?
-Conversion to units? (Eg. Large highset Qld’r being changed in 3 or 4 units.)

-Relocate or build new house on the additional block created?

*Total Redevelopment
Perhaps the land value is such that it is cheaper to completely redevelop the block removing the existing dwelling and turning it into a higher use development.

-High rise units?
-Townhouses?
-Commercial (Retail/Office/Selective industrial)
-Mixed use development?
-Retirement village?

This may involve trying to get it rezoned. However this is not something that happens overnight and you should be able to produce a compelling argument why there should be a change. It is easier for council to approve a rezoning of land right beside land of the same zoning type as you want to rezone it to than to try and get one rezoned in the middle of a completely different zoning.

2) Volatility

An investment decision is part of an ongoing strategy and one that only you can feel happy with.

All of my properties are an easy walking distance (Less than 12 minutes) to both the train and a major shopping centre. It is in an area where there is a very low vacancy rate and corresponding there is a shortage of accommodation.

For myself these investments were made due to fundamental supply and demand rules. My properties will always be in demand provided I continue to continue to upgrade them and I can never be built out since they are so close to existing facilities.

A comparison is to think about what product would you prefer to be selling? Something that someone only needs once or twice a year (IE a holiday or entertainment product) or something someone needs EVERY day (IE toilet paper.).

These same principles can be applied back onto your customers –“tenants”. Quality, lower cost accommodation close to the train, shopping centre, schools and employment will always be in greater demand (IE have more customers available and able to pay the $$$ required to buy your product) than the top end prestige rental who has a very small portion of potential customers and is the first to be vacant when those customers need to cut costs.

Only you can do your research. Do your research and do your own due diligence on the properties you select. If you did this thoroughly in the first place then, and it was a good investment decision why wouldn’t it continue to be so?

Selling is an admission that the initial due diligence was not thorough enough or that one over extended themselves in purchasing. Volatility should be able to be prevented. Prevention is better than cure.

3) Property Value

Property values can go down. Yes that is the nature of the beast. However if you are close to the market then you know when it may have reached a peak and that is the time you “refinance”. Valuers use historical figures so you have up to three months to lock in these refinance rates and simply put these dollars to better use in I) Upgrades II) Redeveloping III) Other projects or IV) Being a little bit patient looking for the right next deal that will give you satisfactory returns.

In a 7-10 year period a minor decrease you may experience is a very minor issue. Looking at a thirty year period for the Sydney median house price (1965-1996) over this period only in 3 out of the 30 years did it go down. (As opposed to units where they went down in 7 out of the 30 years.)


It is important to look at the big picture stuff.

Property investing is a marathon, NOT a sprint.

One chocolate or two?

Cheers,

Sunstone.