Should You Sell Your Investment Property?
The decision to sell a fixed asset like a property or piece of land can sometimes be a challenging decision for an investor. This choice gets even harder when the investor is a novice, as the property world is filled with all kinds of confusing jargon and processes.
“Every property investor will be confronted with this question at some point in their investment journey. Therefore, knowing when to sell or hold your investment property is essential when building a portfolio,” says Praven Subbramoney, CEO of Private Bank Lending at FNB.
“Due to the long-term nature of the property investment journey, the general rule is that property should at least be held for five to 10 years to allow the investor enough time to study market conditions and further assess the viability of their portfolio,” he adds.
We wanted to know more, and why most people end up selling their investment properties. Subbramoney gave us a few of the top reasons for selling.
Firstly, the investor had a pre-existing exit strategy. Some investors venture into property having already developed an exit plan, which consists of selling the properties and using the funds for alternative business interests after a certain time period. This shouldn’t necessarily be seen as an emergency plan for when/if the investment does not pan out, but rather a clear and concise way to keep financial security in case of unforeseen circumstances.
Next, he cites recycling equity. Recycling equity is, simply put, selling a property and using the money generated from the sale to fund a better-performing investment. If planning to use this strategy, it is important to remember the costs involved in selling and acquiring new property – this could affect the cost efficiency of the exercise.
Poor performing properties are, in financial terms, a no-brainer. Being able to clinically assess whether or not a property is profitable or yielding a return in some other way is key to staying in the green on the property market. If a property fails to provide good rental yield and capital returns for five to 10 years, it may be considered to be performing poorly and eventually sold.
Property investors know the importance of diversification, which leads us to the next point. Investors may sell some of their properties to unlock capital and diversify their financial risk to another asset class, such as listed equities. A diverse portfolio is a must for any professional investor.
The decision to buy a property is a complicated one, and location is one of the most important factors. More experienced investors have various processes and often do a lot of research into the neighbourhood in which their potential new property is located. Sometimes, however, it doesn’t work out and the area undergoes a very quick change, meaning it is no longer a desirable location. This is a common reason for selling property. This could also have been the investor’s former place of residence, which they decided to rent out after moving.
Life-changing events are rarely foreseeable, and sometimes they change the suitability of a property for the investor, whether private or professional. More joyous events like marriages or children can spark investors to sell their properties and seek a new direction.
Subbramoney goes on to explain that market timing is key. New investors often get spooked by the property cycle, and sell the moment the value starts to decrease. This usually stems from a lack of understanding about the cycle itself and any potential investor should do their due diligence, making sure not to sell a valuable property at the wrong time.
Selling an investment property is always a tough decision, and there will usually be substantial doubt in your mind, especially after having made the decision to sell. “There are many circumstances and underlying factors that may lead you to consider selling or holding your investment property. The decision should ultimately be based on your current circumstances, investment strategy and what you aim to achieve,” Subbramoney concludes.