Cash up for the Crash: Does it Work?

[Bob Kane]

A strategy that is often mentioned is sell up everything towards the end of the boom and then buy back in during the slump.
Would it work?
I'm thinking that more often than not, it wouldn't.
There's some pretty strong factors going against this strategy:
1. Who can pick the top of the boom and the bottom of the slump?
2. NZ property doesn't seem to drop more than 5-10% during the slump.
3. What happens to your vulture funds while you're waiting to buy back in? Why, you park them in a high interest bearing investment scheme with a finance company..oh that's right...
4. By selling and buying in different markets, you've introduced so much risk that you'd need a huge profit to make it worth while.

Notice I used the term "sell up everything" earlier?
I think that's the problem.
If you only sold up some - maybe half - then you'd do far better.
Use the profit you've made to pay down debt and ride out the slump.
But this is a different strategy to 'Cash up for the Crash' which is why I don't think it works.

[PropertyReturns]

It works all right

A strategy that is often mentioned is sell up everything towards the end of the boom and then buy back in during the slump.
Would it work?
I'm thinking that more often than not, it wouldn't.
There's some pretty strong factors going against this strategy:
1. Who can pick the top of the boom and the bottom of the slump?
No one can, but it is very possible to work out when a property (or any market) is getting dangerous. When the market is very stressed, hyped, booming, when commentators are stating that the world has fundamentally changed and when Labour voters are getting involved. When the financially illiterate (most agents, Herald reporters and 80% of the voters) are talking about a market: just jump! The bottom will be largely the opposite of above and also when interest rates start rising. Just think back to property the early 1990's and the NZ share market in late 1980's and the '.com' share market in early 2000s'.
2. NZ property doesn't seem to drop more than 5-10% during the slump.Yes it does. The '5-10%' (if true and I wouldn't know or care) is only an average and largely meaningless. The market is made up of many individual transactions and each transaction will have its own story. If houses are selling for 10% more in your area only a fool would assume their house has gone up 10%. You may have spent many $$$ on your house or others in your area may have. Many more expensive houses may have to be sold as fools paid to much for them and borrowed to do so.
3. What happens to your vulture funds while you're waiting to buy back in? Why, you park them in a high interest bearing investment scheme with a finance company..oh that's right...If you put your money in a finance company you were obviously greedy and foolish as wanting a few extra % return and not worried about security. The banks were the obvious place to put your money. In NZ you would only put play money anywhere else. Because NZ banks are Australian owned, and Australia is obviously much better governed than NZ, the money was safe.
4. By selling and buying in different markets, you've introduced so much risk that you'd need a huge profit to make it worth while.If you invest for the long term but sell when offered a crazy price, then buy when % more reasonable for the risks involved (for me 10%),

Notice I used the term "sell up everything" earlier?
I think that's the problem.
If you only sold up some - maybe half - then you'd do far better.
Use the profit you've made to pay down debt and ride out the slump.
But this is a different strategy to 'Cash up for the Crash' which is why I don't think it works.

We followed this strategy first in early 1990s'. We largely cashed up mid 2000s and have been buying again over the last few years. Still have a few more years to find good properties. Thank you Cullen for nearly tripling our income. You are such an arrogant quack. You could have used your time to implement policies that would have made most NZers much better off. Remember economic cycles are man made and caused largely by governments. The NZ government's are mostly responsible for what happens in NZ. If you understand this you wil be right mate.

[Dean@Massiveaction]

Selling up mid boom is the single most important thing I have learned from this cycle. That's why so many old school investors do it. Doesn't mean you sell everything, but sell everything ordinary.

[PC]

A good slump under the belt and you're sounding like Olly - Dean!

[Kay]

Sell the dud ones

Selling the lot is way too extreme - a classic case of throwing the baby out with the bathwater.

However, when the boom has gained some momentum it is a great time to sell the non-performing or under-performing ones.

This gives you the cash to provide deposits and take advantage of the slump, when it comes.

[whitt]

Olly has said for a long time later in boom sell the Lemons.
Looks like Dean has picked up a few good bits of advice along the way.

[Davo36]

Well it didn't work for me.

I know PropertyReturns and he was able to sell for not just a good price but for a really crazy price - apartment devleopers wanted his city fringe site.

He was then able to buy a fantastic deal. The best industrial deal I've heard of in the last 5 years. Dunno how, I looked and looked and couldn't find anything like this.

So either there was a lot of luck on his side or he's a really really good investor - or as I suspect, it's a bit of both.

I sold up in 2005/6 too. But the steps I've taken since then haven't been so good. Firstly I just sold for a good price, not a crazily good price. Secondly I bought a good property but the development of it hasn't worked out. So in the same way PropertyReturns had a combination of good skill and good luck, I had a combination of bad luck and some bad skills/decisions.

If I had've just held on to what I had, I would be around $700k better off equity-wise right now. Which really pisses me off! Lol.

[SwissKiwi]

It's a cliche Davo - but it's true - our best learning comes from our mistakes!

[ChrisD]

No one can time the market. Anyone who claims to is deluded or lying. Of course, there are plenty of post-hoc "experts" who claim to be able to do this. I would be surprised if anyone made any money after transaction costs using this technique, beyond pure chance.

[PropertyReturns]

No one can time the market. Anyone who claims to is deluded or lying. Of course, there are plenty of post-hoc "experts" who claim to be able to do this. I would be surprised if anyone made any money after transaction costs using this technique, beyond pure chance.

No one can time the market but this is a different thing to reading the market. When are market is "on a roll/over heated/bullish/not based on fundamentals/fundamentally changed/Bayleys including unrealised capital gains as income" you know it is going to crash. When and how much is a lot more difficult to guess. In 2005/6 when I was selling I was two years or so too early. I am possibly to early with buying now. Trying to get the top or the bottom is impossible, so sell on the up and buy on the down. Always leave something in it for someone else is my thoughts.

[Rolf]

I wonder if all those that regularly sell as part of their long term investment strategy also remember to pay income tax of their profits? An important part of the equation not to be missed.

[NovInvestor]

Yeah I agree it is not easy timing the markets, but since a property cycle is slower, you won't miss too much if you miss the timing slightly (give or take a few months).

A safe route is buying when the recover is on, ie prices start to increase steadily, and sell at the time of cross roads when the news papers and tvs are on a raging bull about property prices, yet concerns about debt/overseas problems.

But at the end of the day, you can't buy back what you sold, so buy and hold works great until a day that you want to cash up (some of your portfolio), quit your day job (unfortunately having a job is best way to get $$$ from the banks), and live on the rents.

[PC]

Buy in Haste, Repent at Leisure.

[Jumpin]

I think Propertyreturns misses the point about parking cash with finance companies - the point is if you sell up, you have to park the cash somewhere, whether stock market, term deposit, gold or elsewhere - and that brings its own risks.

Timing the market is next to impossible - the slump was on its way for many years, but who knew June 2008 would be it? If you saw it coming in 2005 and sold up, you would have be twiddling your thumbs watching everyone else making cash for 3 years while you were out of the market. I didn't buy in 2007/08, not because I worried about the slump, but because the figures didn't work.
What about timing the recovery? Is it time to buy right now? Or should we wait until after China/Australia crash next year, when NZ properties shed a further 20%? The cost of selling is very high with RE fees, Lawyers fees and tax etc. not to mention the time and effort and more fees to re-purchase later. Selling lemons should be done as and when necessary, but if you don't get too over-leveraged you should ride out the storm. I know 'old-timers' who sell and 'old-timers' that don't. They have different strategies, and different property types as well.
Sure, this is my first slump, but with the low interest rates available during the last couple of years, I have more cashflow than I ever had during the boom. Paying off equity during the slump, my L/V ratio has now fallen from about 75% to below 50%, my loans are below $1mill for the first time in ages. Why would I want to sell?

[whitt]

What about timing the recovery? Is it time to buy right now? Or should we wait until after China/Australia crash next year, when NZ properties shed a further 20%?

I think OZ is crashing as we type.
Gold coast prices skyrocketed for many years and are currently in free fall.
I heard retail is slowed prior xmas too.