Why do property investors sell?

[jahn]

Hi
I've only just come upon this thread, (not too good still at circumnavigating all the potentials ) but I thought the article in todays "telegraph" pg 43 could be interesting and relavent.
The article is primarily about shares investing, but states same overall responses generally with property investors.

"A Maquarie Bank study shows most investors fail to recognise and manage their emotions. They are frequently over-optimistic when it comes to investing and over-react later when things don't go as planned."

"The best time to invest is when everything looks grim - just when most individual investors are most reluctant to do so." "In fact, it is at these times that investors are most tempted to sell, re-acting to short term losses."

"Investment psychology expert John Notsinger says the brain does not work like a computer when it makes decisions.
Instead it processes information through shortcuts and emotional filters to shorten the analysis time. The decision you arrive at through this process is often not the same decision you would make without these filters."

It seems to be a good explanation, but I'm not that fast at typing, and don't have the know-how to lead you to it through links etc. Sorry.
It does have 1 other good piece of info re information that people work on and from, and it is - "The fact is that past returns provide information about only one thing - the past."

jahn

 

[Kennethkohsg]

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.

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

1. Thank you very much and I greatly appreciate your reply for there is many pearls of wisdom in it for me to learn regarding the property-investing game. I am much humbled by your wisdom and your investing experience.

2. Frankly, I do not know so many things are involved in this property investing game;- that one can simply add value to increase its rental yields and house value through house upgrading/renovations. I thought it was simply a game of buy and hold and never sell that you are advocating.

3. You are right about my concerns and why I sell off my 2 Goldcoast properties. Yes, I do have more SANF after selling it off, though my trade-off calculations then was that I will lose these income-earning 2 properties in future and having to re-start all over again vis-a-vis losing all my entire property portfolio, should I fail to hold onto to all the properties successfully throughout the prolonged property cycle down-turn period from 2004 till 2008 in the Goldcoast property market.

4. Having said this, however, I am presently more confident holding onto my present 2 Perth properties long term without having to sell them at the next property cycle peak as compared to holding onto my Goldcoast properties due to the different market volatility and the nature of their property cycle trends. In fact, I am planning to get 2 more properties in Perth during 2004-2005 period, by using the available house equities and cashflow available. And if God be willing, I hope to hold onto to these 4 properties in Perth and use their excess house equities subsequently to re-position myself for the Goldcoast property market after 2008 again.

5. Looking back, I was not satisfied with my own due diligence conducted some 10 years ago when I first acquired my 2 properties in the Goldcoast property market. I have bought the 2 properties at retail price and may have probably over-paid for my first property. I came to realise this, only after investing at wholesale price level recently in Perth, when we purchase our own 2 pieces of vacant lands and build our own houses through the commercial builders. Our investing costs were so much lower in this case as compared to what we have paid investing through purchasing completed houses at retail prices. Huge capital gains were also immediately available to us upon the house completion. Overall, our own experiences has been that it took us only one year to generate the same capital gains in this Perth property market through this "buy-and-build" house packages, which has actually taken some 9 years to generate in the Goldcoast property market with our first 2 properties there.

6. Perhaps, you are right that my wife and I may have over-played the potential price downside risks and its consequences before. Nonetheless, we do have better SANF and are comfortable and prudent with our risk management. I guess that with this hindsight and more investing eexperiences, we can afford to be bolder next time when we have to decide again whether or not to hold on vis to sell our properties in future. I will remember to write in to this forum and seek your and other members views first before making our decision.

7. Thank you.

regards,
Kenneth KOH

 

[Aceyducey]

Frankly, I do not know so many things are involved in this property investing game;- that one can simply add value to increase its rental yields and house value through house upgrading/renovations. I thought it was simply a game of buy and hold and never sell that you are advocating.

Horses for courses

One of the beauties of propert investing is that people can pursue very different strategies and still be successful.

I agree with everything Sunstone said in his post, however Kenneth the choices you are making are right for you.

The key is to not assume that everyone else will follow your approach.

I reckon it's good to be prepared to consider different strategies that may accelerate your success. Or in cases where your strategy is either failing to deliver the returns you desire in the timeframes you have set.

Kenneth, it's often said that you make your profit in property when you buy. If you feel you bought badly and your Gold Coast properties are at risk of seriously going backwards, then it makes sense for you to choose the course you have.

However I think you'd agree that their value in twenty years is most likely to be substantially more than their current value.

The difference is in the investment timeframes you are considering. If you're simply looking at survival over the next five years & have issues with servicing the loans, your strategy is correct for you.

Cheers,

Aceyducey

 

[Kennethkohsg]

Horses for courses

One of the beauties of propert investing is that people can pursue very different strategies and still be successful.

I agree with everything Sunstone said in his post, however Kenneth the choices you are making are right for you.

The key is to not assume that everyone else will follow your approach.

I reckon it's good to be prepared to consider different strategies that may accelerate your success. Or in cases where your strategy is either failing to deliver the returns you desire in the timeframes you have set.

Kenneth, it's often said that you make your profit in property when you buy. If you feel you bought badly and your Gold Coast properties are at risk of seriously going backwards, then it makes sense for you to choose the course you have.

However I think you'd agree that their value in twenty years is most likely to be substantially more than their current value.

The difference is in the investment timeframes you are considering. If you're simply looking at survival over the next five years & have issues with servicing the loans, your strategy is correct for you.

Cheers,

Aceyducey

*******************************************
Dear Aceyducey,

1. Thank you for your kind words and encouraging words of re-affirmation. You are indeed a man of wisdom too, broad-minded and show deep understanding.

2. I am still much a novice investor and personally, I still have so much to learn the property investing game in Australia myself, from yourself, from Sunstone and other gurus members in this forum.

3. However, I will be closely monitoring the Australian residential market during this property cycle downturn and fully convince myself that the fundamentals in the Australian residential property market is indeed different from the other property markets in Japan, HK, Malaysia, Singapore and America so that I can plan and decide more effectively in future.

4. I've personally tried Peter Barne's strategy of using timing to speed up the wealth creation process in property investment vis-a-vis the traditional "Buy and Hold and Never Sell" investment strategy that have helped create many of todays' multi-millionaires made rich through property investing as advocated by Jan Somers. I now understand what Jan Somers really meant when she say to allow sufficient time for the "TIME" leverage factor to work itself out in increasing the house values exponentially by holding on to the properties long term as compared to doing property trading by timing the property market/cycle. I still believe that Jan's "Buy-Hold and Never Sell" investment strategy is an effective way to long term wealth creation;- though they may be other different ways of acheiving the same goals too.

5. I am now exploring to go into small scale property development or/and positive cashflow property investing soon and look forward to learning directly from the various gurus who have the master expertise in their respective field of specialisation in property investing for long term wealth creation.

6. I look forward to continually learn from each one of you again.

7. Thank you.

regards,
Kenneth KOH

 

[investor]

Hi all

Buying and selling is the quickest way to increase your capital base (cash).

This is especially true in high CG/low yield areas like Sydney.

Serviceability also plays a major role in Sydney as you can easily reach a barrier with even one ip.

So even if you renovate and revalue the bank just won't give you the money you need to continue leap frogging as the cashflow isn't there.

Alot of people have made more money buying and selling much faster than buying and holding but there is more risk involved and more headache. The rewards are there though.

This new 2.25% exit tax however, will dampen the traders somewhat.

Regards

Investor

 

[Sunstone]

Serviceability also plays a major role in Sydney as you can easily reach a barrier with even one ip.

So even if you renovate and revalue the bank just won't give you the money you need to continue leap frogging as the cashflow isn't there.

Dear Investor,

It is possible to hit brick walls with serviceability. However not all mortgage brokers are created equal. Good ones can provide unlimited finance and this does not mean by only using Steve's methods.

Burning your equity by buying and selling is a waste of resources.

Imagine if you had developed rather than onsold that DA you worked so hard on?

Enjoy the journey.

Cheers,

Sunstone.

 

[Sunstone]

Serviceability also plays a major role in Sydney as you can easily reach a barrier with even one ip.

So even if you renovate and revalue the bank just won't give you the money you need to continue leap frogging as the cashflow isn't there.

Dear Investor,

It is possible to hit brick walls with serviceability. However not all mortgage brokers are created equal. Good ones can provide unlimited finance and this does not mean by only using Steve's methods.

Burning your equity by buying and selling is a waste of resources.

Imagine if you had developed rather than onsold that DA you worked so hard on?

Enjoy the journey.

Cheers,

Sunstone.