Sell or Keep your Property Investment Forever?

Questions Regarding Off-loading Investments

It’s quite easy to buy something isn’t it? Well, as long as you [or a friendly bank] have the money to pay for whatever you want to buy. As a buyer, you are bombarded with constant marketing “messages” urging you to part with your hard-earned cash. And very compelling these messages are of course. The property industry does not exclude itself from this marketing frenzy. Indeed, when budgets are good, estate agents and the like lead from the front. We are convinced by glossy brochures and snazzy websites that some far-flung island in the middle of nowhere is the next “big thing”. The capital growth is assured, the gains are a guarantee. When, after several long flights to visit the property, the only gain you are aware of is thrombosis of the lower leg. Agents can be equally compelling in domestic markets, and are famed for their literal genius, putting JK Rowling to shame with their flights of fancy. Dilapidated bedsits in a grungy areas of town become “Pied de terres” in up and coming part quarters. Watch the word “trendy” and “Latin Quarter”, often a byword for “you will be attacked after dark, whilst standing in a puddle of urine”. Really, there is a book out there waiting to be written. The Estate agents thesaurus. It would keep us all a lot safer, and the world a better place.

But is buying really that easy? Well it can be. But judging by the all the articles and blogs we have ever written apart from this one, all subjects focus around how to buy well. How to navigate the estate agents and find the real deals. So perhaps it is not that easy, and that is the job of the professional investor, or an investor that thinks in a professional way. But what about selling then?

How hard is that? Should you ever sell?

A confession from the outset. I find selling so difficult. Whether it be for some emotional tie, not wanting to say goodbye to an income-producing asset or plainly I do not find it exciting. But this is all wrong. The real gains with any successful investment will come at the point of disposal, so this should really be planned in a methodical manner right from the point of purchase. So, as I lay on the psychiatrists chair and analyse why I have this aversion to selling, I find the answer to be that for the most part of my investment history property has gone up in price. That’s really the point.

In the 17 years I have been an investor, property in the areas I have invested within has probably gone up in price for 13 years. There were perhaps 2 static years and 2 years of falls. And those years of falling prices has, for my UK assets, been the last 2 years. And it is why I am finding therapy by writing this article.

You see, during the good years, a global ‘group think’ emerged that led us all to fully believe that markets always went up. And if they went down, it was only a brief blip. Just get the maximum finance, keep the investment forever and watch the money roll in. You have to say, to a great extent, this simple idea worked for so many people and with near zero interest rates continues to prove viable even if you bought the dingy bedsit in the Latin Quarter. I confess I was taken in by this mantra and, although I like to think I made some good investments, the idea was never to sell.

Never think of selling. Just keep it, take the rent, batten down the hatches when times are bad and re-finance when the times are good. How stupid I now think I am, especially when I was treated to a downturn in the market in the early 90s that I should have learnt from.

You see, the point is that when times are bad they can get very bad very quick and it can take a long time bumping along the bottom before “the good times” roll back in. During the bad times, you can feel yourself reeling, if only you had sold at the peak. Especially true if you have somewhere else to put the money which is now going up in price. In normal interest rate environments, say 5% base rate, the rent you are achieving may only just cover the finance payments, and if a boiler goes wrong or a roof starts to leak you are “cashflow negative”. Quite frankly, you are paying for your tenant to live in your property [how kind] whilst you watch it decrease in value. All things being equal, you really wish you had sold the property when things were good. Difficult to own up to.

Now this takes some discipline. Selling at the point of maximum optimism of buyers and banks takes some nerve and is in market terms contrarian. But it makes real sense, particularly if you hold assets in B grade areas, good yielders, but blighted by a main road or over a shop or something. These units really do need the full force of the market behind them to sell well. The market should be near the peak, and demand outstripping supply so your unit takes bids. So, how do you pick this point? Easy, with benefit of hindsight of course, but there are indicators. Investors are buying off yields far below what you would pay yourself. Perhaps you bought at a 10% yield and now it is 4-5%, that could be an indicator. In owner-occupier terms, buyers could be buying at 4-6 times their annual wage, rather than the usual 2-3. Another is that property is going to sealed bids, and has been doing so for some time, even in less desirable areas. New Estate agent offices abound, and are vying for business. It could be a really good time to give them your business as a seller.

Looking back at some of my UK holdings, I was [a long story, involving drugs and prostitutes] forced to sell a small flat in the city of Aberdeen. I had bought it for £30,000 and put it on the market for £60,000 some 18 months later, fed up of collecting drugs needles in a bag prior to tenant viewings. Such was the market, sealed bids arrived and an offer of £85,000 was lodged. Ridiculous. Still having some ethics, I persuaded the highest bidder that £75,000 really was more than I was expecting and took this price. Now, if I tried to sell the same flat today it would be a different story. Although the market has only dropped by 10% according to the statistics of the city, the property in question is above a pub and therefore blighted. Only yield investors would buy it now, probably with cash. The price would be more like £40,000 and a lot of hard work. I don’t have a calculator to hand, but that is a bigger drop than 10%, particularly if I had been ruthless in price and sold for £85,000.

So, how shall we sum this little piece up? I would say, I am going to take selling of an investment just as seriously as buying in the future. Whilst an investment makes me money each month in rent, the real rewards are at the disposal point and the timing is everything. Otherwise, you are left holding and maintaining a depreciating asset and trying to convince yourself you did the right thing. The last word to finish with is tax. Selling at such high profits will attract attention of the tax man and this needs to be put into the plan. But the government changes its tax regimes each year, and anyway you are going to live on a tax-free island anyway. Aren’t you? See you there in 10 years, when I have sold all my flats above pubs…