Researching a suburb before you buy is clearly important.
However, keeping up the research after the fact is a task that’s a little harder to maintain.
If you don’t know what’s happening in the neighbourhood, how will you know the best course of action for your property?
While clearly investment is about long-term capital growth, sometimes circumstances are such that it’s necessary to consider moving your property on early.
By keeping up with local demand, vacancy rates and future developments, you can make the right decision at the right time.
In this instance, the circumstance I want to look at is a property that is not performing to expectation, and the cost of selling versus the opportunity cost of holding.
Here’s why your knowledge of the local market is so important.
If you know what’s happening with the area you’ve bought in, you’ll be aware when your property is underperforming or in danger of struggling.
An example scenario might be a property that’s only grown 3% in five years of ownership.
But, because your money is tied up in the property, you can’t purchase another, hopefully more successful, investment.
You’d need to weigh up the cost of selling against the potential profit of purchasing another property.
It’s not as simple as just selling and buying.
There are a lot of costs involved in selling a property:
- Legal fees
- Agent’s fees
- Capital Gains Tax
These costs add up to tens of thousands of dollars, and could undermine any gains you might make in buying another investment.
But if you don’t sell, what’s your opportunity cost?
So on the other hand, we have the cost of a missed opportunity.
If you stick with your current property, how much might you miss out on in a more successful investment?
Unfortunately, there are no hard and fast rules when it comes to deciding whether to sell or not.
Nobody can predict exactly where the market will go.
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It takes time to research all the variables and possibilities of the current property, and the potential capital growth of another.
To create an accurate picture, you would need to research past capital growth history, local demographics, local economic factors including jobs creation, demand vs supply and planned infrastructure improvements and plug them into the formula.
Let’s go back to my earlier example.
If your research reveals that another suburb is steadily gaining 9% annual growth, the numbers may reveal that it’s best to sell your 3%-growth asset because the cost of selling is less than missing out on the better opportunity.
Remember- around 80% of your properties performance will be due to its location and only around 20% due to the property itself.
It’s the location that does the heavy lifting – that’s why it’s importunate to know what’s going on there.
If it’s not a worthwhile deal, you could refinance instead of selling.
This is another important reason to know what’s going on in your property’s world.
If you know what part of the cycle the market is in, you can maximise the equity in your property by refinancing at the peak.
You can do this even if you don’t intend to buy another property for a while.
Of course, the question is: how do you know when the market is peaking?
Finding the top of the market is hit or miss, but historical data can show us previous peaks and troughs.
Watching the local supply and demand ratios as well as the level of vendor discounting and days on market sale can provide insight into where the market is heading.
Ultimately, you’re not done with a property once the dust has settled.
Buying a property is just the first stage of the investment.
The term ‘set and forget’ is bandied about, but don’t take it too literally.
Keeping a keen eye on the local market will give you the best chance of maintaining a truly successful portfolio.