We’ve all heard it many times. The best thing to do is to buy property and never sell. The last time I heard it, Warren Buffet was quoted as saying his favourite investment term is forever, but is that actually a good strategy for us mere mortals?
Well, like most things, it depends…
Buying and holding a quality property asset that generates income and increases in capital value over time is certainly not a bad thing. What’s important in making the decision to sell or not sell is the motivation for doing so.
One of the most common reasons touted for not selling is avoiding tax, specifically, capital gains tax. Of course, part of any wealth creation strategy is the minimisation of tax, but if avoiding tax causes you to hold onto a poorly performing asset, what’s the point? As investors, it’s important to come to terms with tax so we’re making decisions for the right reasons. Tax is simply a cost of generating income, perhaps best thought about in the same way we think about rent or salaries or marketing costs – necessary for getting the job done.
If “buy and hold” is not the right strategy in every circumstance, the next question we should ask ourselves is, when should we sell. In almost every other asset class, having an exit strategy is one of the key elements to success; knowing the price point at which you’ll sell your shares for instance. Why should it be different with property?
Here are a few thoughts to help guide your decision-making.
Are you letting your emotions rule?
Investing is based on logic – or at least that’s the theory – but most of us find it difficult to totally remove emotion from our decisions. Sometimes our investments have personal significance; they’re in the neighbourhood where we grew up, or are close to where we live… and we let those factors affect our decision making instead of growth, rental yield and tax effectiveness. As much as possible, try to take the emotion out of the important decisions, like when to sell.
Does the investment fit your strategy and your risk tolerance level?
Buy and hold is an investment strategy, but certainly not the only one. It’s a strategy that may be appropriate if your plan is for long-term growth with relatively low risk (assuming you have selected a fundamentally good asset of course). Some strategies depend on buying and selling and getting the benefit of increased value. Renovating, buying and flipping and the like would obviously fall into this category. Your strategy needs to be appropriate for the type of asset and aligned with your overall objectives.
Each approach carries with it a degree of risk. Having a good understanding of the type of risk and the level of risk you are prepared to tolerate is an important part of the discipline of investing. There’s no point chasing big returns if the added risk is going to give you a heart attack!
Be careful not to get “Investor’s A.D.D.”
Successful investing is a sometimes tricky balance between being patient and having the courage to act when you should. Some investments grow more slowly than others, but that doesn’t necessarily make them a bad investment. If you work on the basis that there is always a better opportunity elsewhere, you will constantly be buying and selling, incurring cost, paying tax and potentially missing out on long term growth. Setting your benchmark and ensuring that each investment is performing at that level in its own right is better than constantly comparing, chopping and changing depending on what’s “big” this week.
That’s not to say you should never sell. Sometimes you just have to make the decision and move on to other, better opportunities. There are many situations where selling is in fact, the smartest move. If you have a property in an area that is not showing any growth over an extended for period instance, or if you geared too highly and the cashflow is hurting, perhaps you bought an older property and the maintenance costs are getting too high, or you were convinced by someone (as often happens) that you were buying in a “boom” area, but the boom just hasn’t happened… This last one by the way, usually coincides with paying too much for the property in the hope that it will go up in value quickly or achieve super high rent.
Whatever the reason, holding on and just hoping for things to improve is NOT a good strategy. Any good investor knows that it is sometimes better to make a decision, sell and move on to better opportunities elsewhere. There’s a place for loyalty; hanging on to a bad investment is not that place.
From a cost perspective, agents’ commission and marketing spend are the two big ones when selling. These could amount to somewhere between 2 and 4 percent of the sale price depending on where you happen to be and whose services you choose to employ. On a big sale, that can be a sizeable amount and our instincts will naturally tell us to avoid it, but what about the opportunity cost? Having your capital tied up in a poorly performing asset is depriving you of the returns that same capital could generate in a better asset. The longer you wait, the greater the opportunity cost becomes. In my experience, most successful investors are decisive. They don’t take months to think about selling; they sell and move on to a better investment.
Finally, keep a close watch on the market and the performance of your investments; our review cycle for example, includes a full portfolio and strategy review every 6 months as a minimum. Monitor the relevant indicators of performance (I’ll talk about these in detail in my next article) and have an exit strategy you can activate when the signs point that way.
John Di Natale is a Director of Equi Wealth. He is an international speaker, wealth creation specialist, financial planner and licensed estate agent.