Episode Details

A common property investing rule-of-thumb is that you should “buy property and never sell”. That’s because prices always trend higher over time which means you benefit from compounding capital growth.

Of course, the rule-of-thumb should be adjusted to include “buy quality property and never sell” to ensure you maximise investment returns.

But the reality is, that sometimes the smartest thing to do, is to sell a property, even if it is a quality asset, if it helps you move forward towards achieving your goals.

I discuss four of the most common scenarios where I have recommended clients sell property.

Poor investment returns

Of course, the most obvious reason for selling a property is that its past performance has been poor i.e., a low capital growth rate. But most importantly, you must form a view about whether future returns are likely to be acceptable or not. If the assets fundamentals are sound, then it’s likely you should retain the asset. Sometimes investing requires patience and discipline, which I’ll write more about in a few weeks.

My previous analysis concluded that a property needs to underperform by at least 2% p.a. to warrant selling it. Therefore, if a property has only slightly underperformed (by say 1% p.a.), it may not be worth selling because doing so crystalises CGT liabilities and selling costs.

I believe that there’s almost never a bad time to buy a quality asset (property). By extension that means there’s never a bad time to sell a dud asset. Whilst that is true to a large extent, it is wise to be strategic about it. A dud asset almost always has one or more impairments (e.g. located on a busy road). Afterall, that’s what makes them duds. As such, they can be more difficult to sell in a balanced or buyer's market. As such, it is best to sell impaired assets in a buoyant (seller’s) market. The rationale is that the high level of buyer demand and positive market sentiment may encourage some potential buyers to overlook the property’s shortfalls.

Illiquidity

Investment property rental yields are relatively low e.g., a house might yield an income of 2% to 2.5% p.a. of its value and an apartment 3% to 3.5% p.a. before expenses. After subtracting expenses such as council rates, insurance, maintenance, property management and so on, you may receive a net rental income of 1% to 2% p.a. And that’s before any interest expenses if you have outstanding mortgages.

An obvious negative attribute of property is that its illiquid. That is, you can’t gradually sell down your investment like you can with shares. Instead, it’s a case of selling all or nothing.

Investing a lot of your wealth in property whilst you are working can make sense because during that stage of life