When to sell, Recyling costs, When to finance

Really like this property blog, , you may also find it helpful or useless.... I like what he has to say

No strategy is ever perfect but IMO I think very smart investing strategies here.

DSR data - scoring supply and demand
Jeremy Shepperd, August 2015
Extract

When to sell - if ever
My worst mistakes in property investing were not selling when I should have. The "never sell" philosophy was drummed into me as a noob by well-meaning educators.

I've bought multiple properties that have doubled in value in 3 years purely from capital growth. That's with no renovation, subdivision, development or any other value adding strategy.

Recycling costs vs opportunity costs
The decision to sell is actually a rather simple one from a strict investment perspective:

If the cost of recycling equity is less than the opportunity cost, then sell

The tricky part is estimating the opportunity cost.

What is recycling equity cost?
When you sell one investment property and use the proceeds to buy another, you're recycling your equity.

What is opportunity cost?
If you have $100 invested in an interest earning account at 3% pa but there is another account which could earn you 4%, then the opportunity cost of not switching is $1 pa. 4% minus 3% equals 1%. $100 x 1% = $1.

In other words, opportunity cost is a measure of the cost of missing out on a better investment elsewhere because your funds are tied up in an inferior investment.

When to refinance
If the recycling costs outweigh the opportunity costs, then I won't sell. But I may refinance.

Ideally, I refinance whenever I have enough equity to invest again (and sufficient cash flow). But another good time is when the market is reaching its peak - even if I don't plan to buy again straight away.

Let's say you have a $500,000 property that has $100,000 equity. The market it is in may reach a peak and fall back by $25,000. Risk of that kind of correction is not enough reason to sell, but refinancing before the drop will maximise your equity out.



There are 3 indicators I use to try and gauge the peak of the market:

1. DSR - Demand to Supply Ratio
2. MCT - Market Cycle Timing indicator
3. Typical Values

MTR

 

Looks good.

I think it could be good to sell when the lvr drops to a certain level as leverage is gone. But I am not sure what this lvr level should be.

But now the game has changed because it may not be possible to get a replacement loan.

 

Its also worth reading the link, it explains markets/cycles very well.

 

There are options. For example, when I sold Melbourne, AMP offered to keep my loan open for 3 months, with a cash from the sale to secure the loan. I would have had to make a security substitution with a suitable property within 3 months. It would have worked out well but it didn't occur to me that my borrowing capacity would drop 50% pre-APRA vs post-APRA.

Still, if an investor is considering selling, they should talk to their broker or lender to see what their options are. It can be strategic to sell. I could not have started my current projects while holding the Melbourne property

 

Another question: when does one pull the equity out from each IP? $30k? 50k? $100k?

 

If market is approaching peak for example anyone who has purchased properties in Melbourne or Sydney which have been booming since 2013 I would expect if not selling they should have already accessed equity.

But other factors need to be considered, cash flow.... and opportunity cost

 

I leave it as long as I can before drawing down. It's not based on a number for me, it's based on necessity

 

Yes, but this is not a new loan, just a substitution of security.

Someone paying a loan out these days may find they can no longer service for a new one - so not paying it out may be a way to keep going.

 

Yes, that's my point. If someone considering selling but concerned about servicing if they pay out the loan and re-borrow, they should talk to their broker or lender about keeping the loan open post sale. What are the conditions? Will the loan automatically close if fully paid? What is the time limit for a security substitution? Not all lenders will do this but it is worth asking. It could be a strategy to sell but also maintain borrowing capacity.

 

Agree. I managed to pull some equity recently (from sydney boom) to purchase a ip from nab before they changed there servicing calculators. I'd wished I did it sooner to release more.

So for me once it's available take it and put a offset account against it if possible because you never know when one can't get it anymore.

 

One of my principles is to "Borrow money when you don't need it as the buggers probably won't give it to you when you do".

 

Yep finding out the hard way. Especially frustrating when you've got ***** loads of equity and can't access it.

 

Opportunity Cost - assess portfolio if you have poor performing asset/property look at offloading to buy a superior product or plough into a rising market for short term gains.

 

Yep, don't wait for the buy-hold-hope strategy because these assets will continue to cost you in the long term, stopping the forward movement.

I sold a lower performer, and regained (some) sanity. Big lesson is to understand why that asset is poorly performing so as to not dip back there again, and to keep assessing markets, both where you want to buy, but also where your current IPs are to capitalise on opportunities. Certainly part of the 'selling is an option' camp (just need a kick sometimes...)

 

I got rid of a dud property, it was supposedly a cash flow cow, it took me 6 months to realise it was never going to be a cash flow cow, went to auction and sold it. Lesson learnt.

Anything I hold now has to fit this criteria

1. Able to add value ie development site, renovation
2. Growth already happening in the area ie gentrifying
3. Cash flow negative only if I am going to be developing within 12-18 months
4. Hold new properties over older properties that are cash flow positive by selling down development, keep 1.

 

Great criteria. Backed up by your comments in other threads about networking with REA (point 1 + 2). Good to understand the balance b/w CG and CF to keep balanced and going. Agree with point 4 (increased maintenance costs can really damage the CF).

One point I might add is when assessing a property, know what the exit strategy is (or why you are holding it long term and what will it cost you over that longer term - comes back to point 4 - newer properties, lower maintenance costs (all things equal).

 

I agree exit strategy important

When buying I always look at best case/worst case scenario as well, in particular when developing because it takes 12-18 months to build/sell etc so I go lower entry, this way I won't bleed if I have to hold