What to do with an under performing property?
As with any assets, real estate has its good, bad and average performing assets and if you’re not careful, you could easily end up with a property lemon.
The problem is owning a dud property means:
• You could be losing money because your holding costs may exceed your income (rent and capital growth)
• You lose the opportunity to make better returns elsewhere
• The lack of equity and rental growth will compromise your ability to keep growing your portfolio.
The key is in the questions.
The best way to uncover an under-performing asset before it eats too far into your bottom line is to annually review your portfolio and ask yourself some hard questions:
1. Is this property performing like I expected it to?
2. Is this property outperforming the market?
3. If this property were on the market today, would I buy it again?
4. Is there anything I could do to improve my property, so that it generates a more attractive return on my investment?
5. Is this property likely to outperform the market averages for the next decade or more?
The answers to these questions help ensure that I retain a top performing property portfolio and that my money works hard for me.
The key to this is to analyse your investment goals and determine if your current property portfolio has you on the right path to achieving those goals.
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What makes a property under-perform?
The problem could be market related or relate specifically to your property and usually falls into one of 4 categories:
1. Timing: Buying at the wrong time in the cycle, when values are at or near the peak can mean that your property’s price may languish for a few years, or even fall in value for a while.
2. Price: Similarly, if you paid too much, you’re likely to have a few years of no capital growth.
3. Location: Some suburbs under-perform others and even in the better areas, some locations are not as desirable as others and under-perform.
4. The property itself. In other words poor property selection.
If you’ve bought the right property at the wrong time or paid too much, you’ll generally find real estate is forgiving and in time your property will start to perform.
But if you’ve bought the wrong property or in the wrong location, sometimes you just need to bight the bullet and sell so you can buy something better.
After all… if a property has not performed well over a 3 or 4-year period, it’s likely to be a dud.
Is it going according to plan?
One of the big mistakes many buyers make is not having a strategy for their purchases.
If you don’t have a plan how do you know what to buy and how do you know if it’s performing as expected?
The other big mistake they make is not reviewing their property portfolio to make sure it’s performing according to plan.
In my opinion this should be done with the help of someone who is independent as many of us get too emotionally attached to our properties.
Then if you’ve bought a dud rather than ignoring it ask yourself: why isn’t this property working like I planned?
Of course this assumes the strategy you’re following works – remember many investors fail because they’re following a flawed plan.
Maybe the answer is as easy as changing to a more proactive property manager, or maybe you could improve its value and make it more attractive to tenants by undertaking some renovations and upgrading your property.
Sometimes it’s simply allowing time to work its magic and waiting for the property cycle to move on.
Selling your lemon
While property is a long-term investment, occasionally the right answer is to cut your losses and sell up so you can buy a better property.
However, if your property is tenanted, consider selling it at or near the end of its lease term to widen the appeal of your property by making it attractive to both owner-occupiers and investors.
But what if it’s the wrong time to sell?
Look at it this way…if, due to your financial capacity, you can only afford to hold five properties you should aim to own the best five performing assets you possibly can.
I know that there are times when the market is flat or the economy is in the drain because of a pandemic and you may not get the price you would like, but waiting to take action until things pick up again will only see the gap between your under-performing property and better performing investments widen as the market improves.
At this point, it will become harder and more expensive to buy the type of property you’d like to own. Essentially the sooner you can identify and offload an under-performing property, the better.
Sure you may crystalize a loss or pay capital gains tax on the sale as well as selling costs and then pay stamp duty and acquisition costs on your next purchase. And I understand that this may mean taking two steps back to move three steps forward.
But if you treat your property investments like a business, and that’s what all strategic investors do, you’ll understand that while it’s costly to dispose of a dud property, it’s even more expensive to hold onto an under performing asset.
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This article via Property Update does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.