Holding Rules?

[Monid]

Bruce has been quizzing me on the Monid: My Story thread and he has prompted me to post something I have been wondering about for awhile. It is pretty common for people to have buying rules in place that govern whether or not they are going to be interested in a property.

I am wondering whether people also have holding rules, in other words rules that govern when they will keep a property or will dispose of it.

I realise this is in part governed by a variety of factors about your present financial circumstances your plans and desires. But there may be some general rules that mean you ought to sell a property.

Here I am (purely speculatively) thinking something like sell when the interest on the amount of money from the sale will be more than you can make from the property once the mortgage is paid off.

Perhaps sell if the interest rates make a property cashflow negative? (Depending on your view of this)

But in general I am curious does anyone have any holding rules that they use to review their portfolio and if so what are these?

Cheers
David

[toby]

No not really after all profit is made on purchase and a purchase is to buy.
Holding is property management not selling, at least that's the way I see it.

[Glen]

I personally prefer to go a little slower, buy well, and hold for the long term.

Consistent, well managed steps, with a view to the future.

Build yourself up, so that if you do fall, then it is still higher, and never lower than if you had done nothing.
Take those steps though, and build those blocks.

[Monid]

I agree Glen, and generally take this approach but sometimes I wonder.

If for example selling a property would make more profit than holding it unencumbered for my likely lifetime then I think it could be sensible to sell it.

I know there have been a couple of people here who have broken the never sell mantra, and are quite happy with the results, I was wondering if those people had any rules of thumb that guided those decisions.

Cheers
David

[Glen]

I just think though that early on regardless......choose wisely and hold on for the ride.

whenever you sell, looking to buy again, it's in a relevant market.

Do we honestly be having to think like farmers.....I think so....work the land....be honest to yourselves and your friends/family.
Buy your stock, think of the future.
Fortunes aren't made overnight.

[Gerrard]

I know there have been a couple of people here who have broken the never sell mantra, and are quite happy with the results, I was wondering if those people had any rules of thumb that guided those decisions.

It seems to me that a lot of people buy and hold with the idea of a retirement income stream (whenever retirement may be and whatever form it may take). That's a good move in my books.

The concept of retirement doesn't exist for me and I suspect it is simply one of those phrases rolled out to attract lowly paid workers who dream of the easy life. (Damn, am reading a Bob Jones book and am even starting to sound like him now...)

My motivation for selling was based on my goals rather than some wishy washy concept of financial freedom in the retirement years.

I was just reviewing it yesterday with a friend. If we had kept 1 of our properties in Wanganui we would today be getting $8,000 a year more income and it would be worth about $80,000 more than it was 2 years ago when we sold. My friend asked how I felt knowing that. I replied that it was fine. If I still had that property I would have missed out on the way I have lived for the last 2 years.

So maybe on paper I'm not as well off today as I could have been, but it's been a great couple of years and I would not change it for anything!

If your goals are clear then the sell/hold decision is a no brainer. My goals were about the near future, not the long term so selling made sense.

Gerrard

[Monid]

So maybe on paper I'm not as well off today as I could have been, but it's been a great couple of years and I would not change it for anything!

If your goals are clear then the sell/hold decision is a no brainer. My goals were about the near future, not the long term so selling made sense.

I was trying to provoke a response out of you (and Gatekeeper *nudge nudge*)
And that seems to sum it up beautifully, it can be worth forgoing future profits for present lifestyle. I agree entirely about retirement, I don't want to do nothing, in fact what I really want to do I am doing, I just wouldn't mind doing it in a different country!

I think you have to keep potential retirement in mind, but not live in such a way that you are deferring everything good until then. That said I also think you need to be financially prudent, so I guess it helps to have small wants, no big red doodad for me thanks!

We are tempted by selling one or two of our properties, but to be honest there would be no real impact on our lifestyle, it would increase our cashflow now, and reduce our future equity gains. In some circumstances I think the trade off is sensible, and we may revisit it, but right now there doesn't seem to be a need.

Cheers
David

[Rosco]

Most investors I talk to don't have a holding rule. But they should.

In my opinion every property investor needs to review their property portfolio at least once a year.

A good investment can be one with good rental income, good capital gain or both. A bad investment is one with poor rental income and poor capital gain potential.

Say you brought a property 10 years ago for $100,000. It is rented for $200 per week or $10,000 per year. So to start with it was a 10% return.

Now it is worth $300,000 (to exaggerate my point) and the rent is still $200 per week. There is no prospect of capital gain (once again to exaggerate my point).

In my opinion this a bad investment or a lemon as its return on current value is only 3.3%. As it is getting no capital gain, then surely it would be better to sell it and buy another property, or even stick the money in the back at 7.5%.

To many people look at what they bought a property for and not what its opportunity cost is, which is really the key factor. Investors should look at what is my current rental return and what prospects do I have for more capital gain over the next 10-20 years. I think on a whole I would hold everything, but everyone buys a lemon sooner or later, and rather then sticking with these it can be better to sell and reinvest into something better.

Ross

[Monid]

Thanks Ross that was the sort of view I was trying to elicit.

I would add to your points though, don't try and time the market (ie hold on for just a few more years because they are going to be great) if we know anything about crystal ball gazing it is that most people are wrong most of the time. And keep in mind if you do sell & or upgrade the impact transaction costs on your profitability.

Nonetheless I agree, that property would be a lemon and if there was a better option available it would be time to switch.

Cheers
David

[sinead]

That's the hard part!!

Nonetheless I agree, that property would be a lemon and if there was a better option available it would be time to switch.

The hard part is finding the better option and managing to cash up and then secure the "better option". The fear factor enter the equation once again. My example is as follows: I have a property on Auckland's North Shore, purchased in 1995 for $135,000. Currently worth approx $350,000, weekly rental $320. Return on original purchase price is great, on market value is very poor. The 6 million dollar question is; if I sold this property for $350,000 would I be able to invest the net proceeds (after depreciation claw back and selling costs) and return more than $320/week. I would expect so but am too scared to do so. I'm worried that I will sell and then not be able to find the 'right' property to purchase.

PS:
Just previewed this post and realise I haven't quite worked out how to do the quote properly, apologies in advance. Will take time to figure it out for the next time.

Sinead

[Monid]

Hi Sinead if you hit edit above you should be able to see what is needed to do a quote basically it is
[ quote=username]
X Y & Z
[ /quote]

With the space in between the bracket and the quote /quote removed.

You are absolutely right that there both may not be a better option on the present market & that doing so is scary.

I would identify the option first, get it under contract and then sell if possible (you should have the equity for this by the sounds of things) means you don't get left out.

You do have to make sure you are comparing apples and apples though. In particular you need to take into account a reasonable level of capital growth and cashflow for the area. This is often going to mean just moving to a bank account isn't a good move since the capital gain + cashflow is often higher than interest rates.

Cheers David

[BamBam]

If you sell you can spend the cash only once. If you keep you can recycle equity forever.
An example in real figures on one of my properties.
PP. 155k
Loan. 140k
Rent. 290pw
Latest Valuation. 280k.
Equity. 140k

This place was purchased as a 1 brm flat in Oct 2005. We built a wall across the lounge turning it instantly into a 2 brm.

Return on pp is 9.7%. Return on Market Value 5.3%.

So if i sold it i would get 140k before cost and be able to by a flash car and other flash bells and whistles. However if we keep it we can us the equity time and again for more property purchases.
To me return on market value means nothing. The real figures are P.P, Loan amount, Equity, LVR and return on investment.
Rosco:
"Say you brought a property 10 years ago for $100,000. It is rented for $200 per week or $10,000 per year. So to start with it was a 10% return.

Now it is worth $300,000 (to exaggerate my point) and the rent is still $200 per week. There is no prospect of capital gain (once again to exaggerate my point)"

Havent you just made 200k cap gain or am i missing something. How can it possibly be a lemon if its cash flow positive and made a capital gain of 200k. You must have very tight investing rules rosco.

[Monid]

Hey BamBam

I generally agree with your point, but keep in mind that you aren't just taking the cash and running in this scenario, you are putting it into another asset one which is presumably rising in value as well (otherwise it is hardly an upgrade) Return on market value is important, for assessing this and whether a switch is worthwhile.

And even on the cashing out scenario, leverage is only useful if it can buy you an asset which is returning more than it is costing you to buy it. Equity growth is dandy, but it doesn't put bread on the table (Unless you use a terrifying reverse equity product, but then you are really cashing out).

Havent you just made 200k cap gain or am i missing something. How can it possibly be a lemon if its cash flow positive and made a capital gain of 200k. You must have very tight investing rules rosco.

I think Rosco is hypothetically claiming there will be no more capital gains. In this case, the property was a good buy, but is now a lemon to hold onto since the money could work harder elsewhere.

Cheers David

[sinead]

Thanks for the help David, I think I've got it.

Return on market value is important, for assessing this and whether a switch is worthwhile.

Equity growth is dandy, but it doesn't put bread on the table (Unless you use a terrifying reverse equity product, but then you are really cashing out).

I agree with David, it's about getting the best return possible. The only way to be able to use keep using the additional equity is if you can also keep the cash flow growing also otherwise serviceability becomes an issue.

Good solution to secure the new property before selling the existing one. I'll keep looking.

Regards

Sinead