Melbourne CBD - received offer over ~28% what I paid in 2012...sell or hold?

I'm in a tough "should I sell or not" situation so I thought I would reach out to the brains trust.

I know the gut instinct is to read the subject and immediately say "of course you should sell!" because it's Melbourne CBD after all, and if I'm lucky enough to have made a profit, take the damn money and run...but please bear with me as there is more to consider.

I bought the apartment in 2012 and because of the oversupply, for years now I've been under the assumption that I've made a loss. To my surprise, my neighbour, who had an identical apartment to mine (perfect mirror image), just sold for over 25% more than I paid. A buyer who regretfully missed out buying my neighbor's place now wants mine. He has contacted his agent who has reached out to me to offer similar terms.

Here's my rundown of the pros and cons:

Reasons to Hold:

• As you can see in the photos below, it has generous proportions (67sqm 1 bed, compared to ~40sqm of modern day dog boxes) and stunning 3.4m ceilings, located in a beautiful old school building.
• Relatively high land to apartment ratio, only 71 apartments in the entire building (quite low for CBD, although that being said I've been even smaller blocks before!).
• Building is tightly held, I've been monitoring this since 2012 and only about 2-4 have gone for sale (per year). In fact for a few years I only saw literally one sale I think.
• Very high number of owner occupiers, 41 out of 71...which is almost unheard of in the CBD. They used to run a building newsletter and the enthusiasm and love for the building that some of the owners used to have was pretty shocking to me.
• Relatively low body corporate (3.5k pa). No pool, just two elevators and a tiny gym the size of a small studio apartment.
• I should be able to keep it for the long term, my cash reserves are solid.
• I almost certainly can't redeploy my money elsewhere as the APRA changes mean I can't even afford what I already have, so it's not like I have the option to sell this and buy elsewhere.
• My tax rate this year is going to be high, but will drop next FY as I'm taking a year of leave. Bad time to sell with 3 months left in this financial year.

Reasons to Sell:

• Melbourne CBD / appt oversupply, enough said.
• First floor (sunlight is not great at all, the photos below were taken on a nice day...and how many of those do you get in Melbourne). The next building is only one laneway across. It's pretty well elevated because of an incline in the lineway, so it's basically like equivalent to being on the second floor from a security perspective, but the sunlight still sucks.
• Postcode 3000 is black listed by most banks. I can't see how this isn't going to obliterate even the best of properties in the coming years.
• It's unlikely such a decent offer will come along again any time soon. A ~28% profit is not huge by any stretch of the imagination, especially considering what I could have made in Sydney in that time, but this is pretty damn good for Melbourne CBD.
• Often people say the way to decide whether to sell is to ask yourself if you would buy it again right here and now...and given the choice, my answer would be no. I would definitely buy elsewhere.

Neutral:

• Vic first home buyers grant coming up - I imagine this will have a positive effect on the lower end of the market in several months, but this boost will be short lived so if I plan on selling immediately or holding on for long term this is a non-issue anyway, therefore I have listed this as "neutral" and not a positive. The only time to take advantage of this will be in the short to medium term, not the extremely immediate or extremely long term.

I am honestly completely divided on whether to sell or not. I'd appreciate it if some more experienced investors here would be able to comment. What are your thoughts? Are any of my pros or cons missing anything? Are any of my assumptions just flat out wrong and am I making decisions based on flawed assumptions? Let me know what you think...

 

I never know how to calculate this...is it based on net rent or gross, should I factor in expenses or not?

Anyway purchase price was $362k, rent is currently $420pw. I have heard the rental market has picked up quite a bit after some of the huge projects came online about 2 years ago, and I might be able to increase this rent, but the tenant is a DREAM so I'm going to reward her by not touching it.

 

Which part of the CBD?

 

It's in what they call the "Legal District" of Melbourne, right here:

 

Long term goal is to develop a portfolio with strong cashflow so I can stop working.

 

But what is your actual goal? What do you want the property to achieve for you? If your goal is more short to medium term growth than you've achieved, and you can't buy again then possibly you should sell and buy in another rising market. For long term gain you could probably hold it. For increased cashflow sell. Don't mix emotion with investing. It looks like an amazing asset long term but I don't know what you need to achieve or timeline.

So do you plan to sell it at some point to buy a higher yield investment for cash flow? What's your timescale for doing this? What else do you need to do?

As beautiful as it is I'm assuming this apartment is a vehicle for reaching your financial goal. Write out a plan if you haven't already.

 

I completely understand what you're saying, but I simply don't have one of those, and it's not a matter of just sitting down and giving it some hard thought. My life has basically turned 180 degrees every few years for the last 15 years and I just can't predict things anymore or set my sights on anything. All I can do is try to put myself in the best position that I can which will leave me with options when I finally figure out what it is I want to do. I know that's a rubbish answer but it's true. Yes you can burn yourself by jumping in without a solid plan, but on the other hand I'd be burning serious time waiting for that eureka moment. With the little direction I've had so far I think I've done pretty well, with this being one of the few dark spots in my journey.

 

Hum kind of feels good that the two issues I saw as the biggest considerations were picked up by you. At least my analysis feels like it's on the right path then.

 

You're already in the market with a solid asset so no time is being wasted. It may suit you just to hold on to what you have without a plan for now, that's up to you. You asked for ideas about whether to buy or hold though and that really depends on a number of factors like how active or passive you want to be. Do you have a desire to sell ips at markt peak and buy into another market to catch more growth or are you happy holding even though you may get some correctionin value for a time whilst there's an oversupply? It's a very personal decision but either way you have a beautiful apartment

 

I plan to never sell. I haven't sold a single asset yet as long as I've been buying property but I guess the doom and gloom surrounding Melbourne CBD appt's has got me wondering for the first time...

 

Never selling is fine but you said you want to retire on rental income I think. So you need to calculate the net yield of your properties, how much they cost you to hold, and what proportion of your debt needs to be paid off to get the income you're aiming for. Then you'll have your answer of what to sell.

 

Agree on calculating net yield. Other considerations are how is the rent been doing for the past 2 years? You can try checking the rents for other units in the block. If the rental growth is showing signs of stagnating or reversing, then perhaps your future net yield will suffer.

All in all, good problem to have as at least you know you are still getting CG from the property.

Edit: removed incorrect statement

 

The important date is contract date, not settlement date... so no contract to sell can be signed till next financial year.

If your lender can leave your loan open for a security subsitution, this won't be an issue.


My thoughts... 28% growth isn't enough. You own in a building with character and it appears pretty spacious so no wonder it has a high ratio of OO's. It will always be in demand. Keep. Unless you know a better place to put that money.

 

Ah yes, you are right. My bad. I recall someone I know was trying to do an option structure to sell his property to a prospective buyer to overcome that.

Have edited my original post to remove incorrect statement.

 

By 'on the first floor' do you mean the ground floor or the floor above the ground floor?

 

All apartments are different, yours looks very great - spacious, in a good location and the building has its character (although one may argue that there are no views). Long term it is a great hold, but if you are in a tough situation, then cash out and invest in something else provided that something new will be as good you think it may be long term.

 

The property market is too slow a wealth creation tool. Sell out and invest in almond farms. That's where the real money is.

 

Honestly I think apartments in Melbourne right now are just too risky. If you look at your competition - what is currently on offer in the CBD - there are thousands of listings. Just in the Melbourne CBD suburb there are 741 properties listed (not even including hundreds in neighbouring suburbs like North Melb, Southbank, Docklands etc). There are only 63 sales in the last month, with some very desperate language. There is also a rising trend of developer discounting - and that is a worry. Investors will struggle to compete if that discounting ("free BMWs" - yes that has recently been offered by a developer - and the like) gets more aggressive.

Bubble talk and negative sentiment seem to be sharply increasing (the fact "sell" is people's assumed reflex right now when it comes to CBD apartments in big cities is telling - whether the bubble corrects in other sectors or not, people are definitely starting to see apartments more negatively). We've just had the RBA, APRA, ASIC - all of them express some pretty explicit concerns within a week. We've also got an environment of tightening lending conditions and rising rates.

You could make more if you hold, but I think there's a stronger argument you stand to lose out in the long term. The sheer volume of apartments coming online is a big issue, and they are disproportionately bought by investors - especially off-the-plan. This could put sudden pressure on prices. If a lot of off-the-plan buyers can't settle or sell at a loss (and a recent study by BIS Oxford Economics showed 60% of new apartments in Melbourne have sold at a loss since 2011) then you could end up competing with a large number of owners and developers hoping to offload on the cheap.

You're in a great position to sell now, with a strong offer. cashing yourself out of risk is arguably a bigger benefit than potential lost future profits. I say do it, then put the money into another asset - the best option in my opinion is a quality detached (separate) house, in a tightly held middle income suburb. Brisbane, Adelaide, Perth - these markets are already in the doldrums and they aren't especially bubbly (though do NOT buy a Brisbane apartment). Large diverse economies like these have a strong potential for growth. With Sydney and Melbourne, I think people are starting to believe growth has overshot reality by a good way, which is why I'd avoid those markets.