Expert Bust #30 Never Sell, Really?

When I was a novice property investor, it was drummed into me by the experts of the day, that you buy and never sell because it's too expensive "trading" property. But I've learnt that there are cases where it makes perfect financial sense to sell and invest your dollars elsewhere.

As usual, it all comes down to the numbers: recycle costs vs. opportunity costs. How much will it cost me to sell and buy again are the recycling costs:

• Exist costs:
  • CGT
  • Agent's commission
  • Legal fees
• Re-entry costs:
  • Stamp duty
  • Legal fees
  • Inspections

How much am I missing out on if I were to own elsewhere are the opportunity costs:

• Alternative investment returns minus Current investment returns

If opportunity costs comfortably outweigh recycling costs, then it makes sense to sell and buy the alternative property. But if recycling costs outweigh opportunity costs (or are close enough), then it makes sense to hold. The catch is:

How do you know by how much the alternative property will outperform your current property?

If you have quite literally absolutely no idea, then how do you choose any investment location in the 1st place? Unless you're rolling dice, you "believe" you have some idea and you believe it enough to allocate half a million dollars somewhere.

Before going to far with that thought, check out these charts...



Imagine holding a negatively geared property in Sydney for 5 years w/o growth. This period of low growth started just after the end of a period of massive high growth. Here's Melbourne...


Melbourne had some great growth in the 80s. But the 90s were a long drought.

After a really strong growth spurt, comes a growth burst. And it lasts a long time.

But while one market is floundering, another is flourishing. And the difference between the two can be extreme. That's the opportunity cost of hanging onto property during those slumps.

I'm not talking about one property delivering 30% growth over the next 4 years while the other delivers only 20%. I'm talking about one delivering 50% while the other is almost flat. Like this...



If there's more than a 20% difference in forecast performances, then it's enough to make selling worthwhile.



And it's not an infrequent or peculiar circumstance either...







There's definitely a time to sell, even if we don't know with absolute certainty when it is. Staying open-minded and assessing each case is better than a blanket strategy.

 

Good one Jeremy.

The flat / declining period can easily stretch over a decade in some cases. It's definitely worth considering the opportunity cost.

On the other hand, "when to sell' can be hard though. I reckon it's a lot harder than "when to buy" as you can easily lose the final 20-50% of growth if you sell too early (e.g. if someone sold in Sydney in 2015...) and if you sell too late, it can get quite illiquid in a flat / declining market.

 

I guess the other way to look at it is "cycle". The recent cycle in Perth, including the last one, is better to sell at peak or near peak and keep the money. Then buy when it's ready. Of course one can invest the proceeds into something else, not necessarily another property.

 

The other reason not to sell is you may not be able to re-purchase a similar property for many years , perhaps you may never get another opportunity to buy another similar property like you once owned.

 

I used to have the mantra never never sell but, taking profits off the table and reinvesting elsewhere is something i have done. I dont look back at the past investments. Money has been used to increase offsets, new PPOR, renovate PPOR, reduce PPOR debt and purchase new IP……Maturing as an investor and looking for different opportunities. Opposite to many investors and spruikers I have narrowed my search area, and have different criteria to 10-15 years ago.
Purchase of the current PPOR has most probably been the best investment yet.

 

My approach has been very similar and I believe it is one of biggest reasons which has allowed me to grow quite aggressively and relatively quickly over the last 20 years. I acknowledge its not for everyone and we each need to operate in a way which makes sense for us and we're comfortable with .

But selling down (certain stock) after phenomenal gains and reinvesting has been a strategy which has worked very well for us too.