For many of us, there’s a general reluctance to sell which can end up with us finding out to our cost that the best time to sell was well before we finally decided to. So, what do we need to do get past our fears and uncertainties when it comes to the property market?
While property investors usually have a clear expectation of the benefits that property investment can provide, many don’t appreciate that knowing the right time to sell is one of the most critical parts of achieving a successful outcome. We may not even have given a property exit strategy much thought if our aim has been to buy and hold for long term growth, or to generate income through high cash flow yielding properties. But even if we have such long term aims, there may come a time when the market where our investments are located is about to suffer a severe and enduring setback, when selling is the only viable option and we need to know when this is about to occur.
It is even more crucial to know when the right time to sell has arrived if our strategy relies on timing, such as flipping, trading, or riding waves of growth and there has been a recent growth spurt or even a boom in prices.
For many of us, there’s also a general reluctance to sell which can end up with us finding out to our cost that the best time to sell was well before we finally decided to.
OVERCOME FEARS OF MISSING OUT
Because we buy properties as investments and not to live in ourselves, our hearts should never over-rule our heads and this applies to selling them as well. The decision should be a purely commercial one based entirely on selling the property quickly, effortlessly and getting the best possible price. One of the times we may hesitate is when the market has finally gone gangbusters and prices are booming. We become concerned that if we sell, we may miss out on further growth.
Aren’t we much better off not listening to any of them and extracting every dollar of profit out of the market while you can, waiting for the growth to end and then selling?
The reason that such a cliff edge strategy is flawed is because such critical moments usually arrive unheralded. The expert commentaries that you read in property media rely on published sales and sale price data, which not only take several months to obtain, check and publish but relate to sales which occurred even further back in time.
If you look only at published data, you won’t know that a boom is over until it’s too late to sell, because you are seeing the results of market activity that occurred many months earlier. Once the number of intending sellers exceeds the number of intending buyers in any suburb or town the tipping point has been reached and the boom is at an end. But you won’t know this until the sales trickle through months later and by then the real situation may have deteriorated into something much more sinister.
Booms can go bad very quickly, especially speculative ones where most of the owners are investors and price gains are sought by selling to other investors.
AVOID AN ENDLESS WAIT FOR GROWTH
On the other hand, it sometimes seems to take forever for the long awaited (or promised) growth to kick in. Investors in parts of the country where growth is sluggish or non-existent are continually reassured that the housing market cycle is slowly turning, or the property clock is ticking away and soon it will be time for growth to start. Hang in there, they are told – don’t sell and all will be well.
This is arguably the worst advice any investor could receive, as there are always better ways to invest than in areas which are going backwards. A good example of this is the situation on Russell Island, one of many in Moreton Bay just a short trip by ferry from Brisbane. The island was developed in the seventies, with around 20,000 residential blocks sold mainly to investors on the premise that a bridge would be built to the mainland and that prices would quickly shoot upwards.
Over forty years later the bridge to the mainland is yet to be built, but buyers who wanted to build on their properties discovered that many were located in areas of poor drainage and some even disappeared at high tide. Around 14,000 lots could never be built on and were worthless.
The stigma associated with that early dodgy development remains and Russell Island’s median house price at $190,000 is the lowest in Greater Brisbane, while nearly 1,000 of the 6,000 buildable blocks of land are currently languishing on the market with a median asking price of around $35,000. Many of these are located in prime areas of the island, with water views and are ideal investments but it has taken over forty years for the market to move from being stressed to a buyer market. While sales are rising this is not yet reflected in any lift in the sale price. There are simply too many owners waiting for something to happen and they’ve been waiting a long, long time. The lesson is simple – the right time to sell is when there are better opportunities elsewhere.
NEW OPPORTUNITIES HAVE A COST
While there’s no doubt that selling a property and buying another is a costly business, there’s another cost that we need to take into account when assessing our options and that’s the cost of missing out on another opportunity. This is known as a lost opportunity cost. The benefit that you expect to obtain from a new opportunity must therefore be greater than the cost of not taking action.
The largest cost in selling is the estate agent’s fee, which can vary from less than 2% to over 4% depending on the price, area, type of market and what you expect the agent to do on your behalf, while the biggest hit in buying is Stamp Duty, which varies by State and Territory from 3% of the purchase price to around 5%. Then there’s Capital Gains Tax which applies to all your investment properties even though it is only paid after you sell them. The rule is that you must expect to achieve annual capital growth greater than 8% from your new investment, to cover the cost of selling and buying again. You can easily work this out in your own situation, bearing in mind the variables such as the agent’s commission and Stamp Duty. We may hesitate to sell because of these costs, but not selling at the right time can be far more damaging to our bottom line.
HOW TO READ THE REAL-TIME SIGNS WHICH PREDICT CHANGE
There are many different indicators of property market changes available to investors including sales, stock on market, rental vacancies, median sale prices, asking rents, auction clearances, time on market, vendor discounting, hold time between sales, on line search trends and rental yields.
If we include demographic and other housing related data we can also analyse population change and movements, housing finance data, dwelling approvals and commencements and we may even check economic information such as unemployment stats and confidence ratings. The fact is that most investors don’t have the time or expertise to understand these figures, and they’re not alone – many experts don’t seem to know their effect on housing markets either, with the result that we can make the wrong decisions based on their advice. Not only are many of these stats hard to understand, they are often out of date by the time we get to see them. This is why you need to use real time data – information that tells you what is happening in areas where your properties are located right now, and what likely effect this may have on their prices and rents. Luckily, we have access to the data we need, and it’s free.
USE RISING RENTAL VACANCIES AS AN EARLY WARNING SYSTEM
Nearly 70% of units and apartments in Australia are investor-owned and while the percentage for houses is much lower at 25%, there are suburban areas with high numbers of recently arrived migrants, ex-housing commission areas and areas where new households rent which have much higher percentages of house rental stock. In mining towns, ports and other regional single industry towns the percentage of rented houses can reach up to 80% of the total. Strong rental demand keeps investors in these areas, but as soon as the rental demand falls, investors notice rising vacancy rates followed by falls in asking rents and then, if enough investors decide to sell, a fall in prices, which can lead to a collapse of the entire market. Tracking rental vacancies is an easy way to keep your finger on the property pulse - just look up your suburb or town in any well used on-line property listing site and check the total number of houses or units available for rent.
TREAT RISING LISTINGS AS A DANGER SIGN
Even if your investment property is not in an area where renters form most of the households, you can check the direction of the local housing market by gathering the total number of listings (houses or units on the market) in your selected suburbs or towns from the same major on-line listing site of your choice every month. This will give you enough data to make accurate short term forecasts about the nature and direction of any housing market.
These are not the only ways to track potential changes, but they are free, easy to do and they are real time, giving you an insight into potential market changes as they occur. It is essential that you know the right time to exit a market – even if you miss out on a little more equity, there’s nothing wrong with taking a profit. On the other hand, there’s nothing right about taking a massive hip pocket hit you could easily have avoided.