Why a ‘set and forget’ mentality in property will always backfire on you

You’ve done your due diligence, negotiated hard and finally, after months of investing your time, energy and resources into real estate, you’ve finally settled on your investment property purchase.

The property is already tenanted so now that all the hard work is out the way, you can finally relax – right?  

Not quite.

A common pitfall for property investors is switching off after a purchase is complete.

It can be easy to move straight on to the search for the next prospective property or return to your normal daily responsibilities without considering your investment any further.

However, it’s really important to keep a close eye on your property, even when it’s chugging along happily in its tenanted state.

Opportunities can be missed when you forget to regularly review the performance of your properties.

What should you be looking for?

Regardless of the type of property you own, a ‘set and forget’ mentality will ultimately not achieve the best outcome for you – as the work continues well after you’ve signed on the dotted line.

You’ll need to keep a close watch on the market to make sure you don’t miss the best opportunity to sell, refinance or make changes to your rent.

• Refinancing

An important reason to keep watch on your investments, and the state of your finances and current interest rates, is because it can help you work out a good time to refinance. You might want to refinance because:

• Interest rates have lowered
• The loan’s term can be shortened
• You want to switching from a fixed rate to a variable, or vice versa
• You want to tap into your equity to secure another purchase

There may be costs involved with refinancing, so you’ll need to calculate if the switch is fiscally worthwhile.

But if you don’t check in on your mortgage regularly – maybe every year or so - you could missing out on huge savings and opportunities to further grow your wealth.

• Evaluating your rent and lease terms 

Yes, you engage a property manager to help you, but that doesn’t mean you can afford to hand over all of the work to them entirely.

A good property manager should make sure your property is keeping up with current rental prices, but it’s always a good idea for you to also keep an eye on vacancy rates and the state of the rental market.

If vacancy rates are increasing, it might be a worth considering offering your tenant another lease term to ensure you maintain your rental income if local demand slips.

• Maybe you should sell

Many experts say, ‘buy and never sell’.

At Metropole, our strategy is “buy and seldom sell”, because there are circumstances where selling early can be a better bet.

For instance, as if you’ve bought an underperforming property and it’s unlikely to turn around in the medium term it might be wise to sell up and use your funds more efficiently by purchasing a better property in a more rewarding location.

If you’re considering selling, there’s a formula you can use to decide whether letting go of a property is worthwhile.

The formula is: recycling equity vs opportunity costs.

Or to put it another way, estimating the expenses of selling against the potential gain from a new property.

Recycling equity means selling a property and using the equity to fund the next purchase.

Selling and purchasing incur fees and expenses that must be calculated (and estimated where needs be) in order to determine if selling one property to buy another will be financially advantageous. 

The big expenses for selling include agents’ commissions, legal fees, and Capital Gains Tax, while buying will cost you in stamp duty, more legal fees and pest and building inspections.

To work out whether selling makes sense, you’ll need to estimate potential lost opportunity costs.

Opportunity cost is the measure of financial loss between two investments.

Let’s say you decided to purchase a house for $400,000 in Suburb A instead of a house in Suburb B, but Suburb B’s market value increased far more over the following years.

The money you lost by purchasing in Suburb A instead of the house in Suburb B is your opportunity cost.

Another example might be choosing to leave your deposit money in a high-interest account instead of using it to buy an investment property.

After 4 years, your high-interest account has netted you $8,000 after tax – but the property you were looking at has just sold for a net profit of $110,000. Your opportunity cost is $102,000.

Estimating market growth

Estimating the market outlook for the property factors into your decision to sell or hold also.

If a suburb is expected to achieve increasing values due to high demand, economic growth or employment opportunities, you can factor that into your formula. 

If, after all your thorough calculations, you find the cost of recycling equity is less than the opportunity cost, then selling is a good option.

Remember to utilise your team of experts, including an independent property strategist when making big decisions around buying and selling.

At the end of the day, you are the one with a vest interested in the financial outcome of your investments, so you need to keep an eye on trends in mortgage and finance as well – but having proactive, professional finance experts on your help will help guide you towards the best outcomes for your situation.

It does take a small investment in time to keep up the research after you’ve done the hard yards of purchasing, but it’s a necessary process.

Being a proactive investor is a far more successful strategy for success in real estate, as you have the peace of mind that you’re always getting the most out of your property and your money.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.