Time to get rid of those dud investment properties

Angus Raine, the chairman of the Raine & Horne agency, is quite right when he recently advised the robust Sydney property market presented the opportunity for homeowners to sell properties that typically take longer to shift in softer conditions.

"Properties with some limitations can sell twice as fast as they would in a softer market," he suggested.

He's talking about houses and apartments that tick fewer boxes than others perhaps based on size, style and location.

It could be an apartment with no parking or balcony, a third-floor unit in a walk-up building, or a house located on a main road or across from a railway line.

"Typically in softer markets, properties like this may take longer to sell, but now they are selling weeks faster.

"This is because a bull market, like we’re seeing now, smooths out the detractors and gets properties moving, even those which could best be described as ‘having some flies on them.’

There is no doubting 2015 ranks also as an opportunity to offload any non-performing investment in your portfolio. 

While the intensity has diminished in the auction market, delaying is not in all likelihood going to yield any better result in the foreseeable future.  

Buyers agent Simon Pressley at propertyology says waiting doesn't necessarily mean winning. 

Meanwhile a financial advisor, after a decade of reviewing 100s of investor portfolios, recently estimated that 60 % to 70% of investors have had a least one dud or under-performing property. Big promises, big rewards, then big disappointment.

Quality is fundamental for the property’s long term capital growth rate. It is generally accepted that the cash flow cost of a good property versus a dud property is going to be pretty much the same as both have borrowings, stamp duty and other maintenance costs, and probably even a similar rental income.

As a rough historic rule of thumb an investment-grade property should double in value every seven years, though given recent cycles more likely to be every 10 years.

But the dud property won’t achieve any where near these returns. 

The difference between a 5% and 8% p.a. growth rate on a $500,000 property if retained for around two decades is around $900,000 in equity.

And there is another cost of holding a dud property that is the lost opportunity.

Even if a property is not costing money with the rental income covering all expenses and interest, it is still using or constraining some of your borrowing capacity that could be allocated to a better property.

Property investment has no set and forget option so it may, as unpalitable as it is, to actually crystallise a loss this spring, or to prepare to pay some capital gains tax on the sale and then to pay stamp duty on any next purchase.

Professionally achieving your financial goals starts with annually assessing your property, perhaps starting with estimating the capital growth rate since its purchase date compared to the median/market rate of the suburb and city. Look too at the historic growth rate of the property before you bought it. Review the location of the property, orientation, architectural style, floor plan in discussions with local estate agents and buyers’ agents who understand the market.

If you are seeking out your first investment, given the costs of entry, best endeavour to get it right the first time round by seeking out independent advice. Any investor ought dispassionating step back from any hasty decision.

This article first appeared in The Saturday Daily Telegraph.