I’ve always been an advocate for property investments. It started when I was young and property has been, by far, the biggest driver of my wealth creation over the last decade. I’ve always thought you should hold a property for at least 15 years, which is a good time limit you should set yourself to pay off the mortgage. But what happens when that time limit passes? Should you sell? What signs should you be looking at to indicate it may be time to sell that Investment Property?
I bought my first property just as I was coming out of my twenties. Three more followed suit within the first 5 years and I bought my 7th property just over a year ago.
I have always believed that property is a great source of wealth creation and my experience has proved this to be true.
I grew up in a country where inflation rates were often in the low twenties, something that I’m almost forgotten about now (and I’m thankful for that!). However, what stuck with me, from that time, is the power of property as an inflation hedge. My parents house(s) managed to keep track with inflation and thanks to them always being home owners, they were able to retire with a modest sum of money and a paid off primary residence. Hearing them talk about it so often got me set on the objective of owning property.
I rented for a few years before I was able to build up a deposit to buy my first property in my early thirties. The rental years left a bitter taste in my mouth, as I always felt I was paying off someone else’s mortgage.
However, after more than a decade and a half of owning several investment properties, a great real estate market and several amazing tenants, I’ve been wondering whether it is now time to sell?
My thinking hasn’t been just on a whim, as I gaze into the distance, as a great Chief Money Man, I’ve been evaluating a series of elements, that I can summarize below as the 6 simple signs that indicate it may be time to sell that Investment Property.
1. You could get better returns elsewhere
Evaluating the return on an investment property takes a bit of time and effort. You need to track your income and expenses and make sure you know the net amount your property is generating every year.
This may sound obvious, but you’d be amazed at the number of property owners I’ve met over the years that didn’t know exactly what their property was making.
You also need to keep track of the capital value of the property and how much it is increasing in value each year.
The combination of the net income and increase in capital value is the total return of the property.
Comparing the total return to the initial investment gives you the annual performance of the property as an investment asset.
Once you have that, it is easy to compare your return to the last 12 months stock market returns or bond market or whatever other asset class you think could be interesting to invest in.
If you’re finding that your property is consistently under performing other asset classes, then it may indicate that it is time to sell.
2. The property market outlook has started declining
It is hard to time the market (any market) and know exactly when things might turn the other way.
What you can do it keep following what market participants and experts believe might happen. Don’t settle for just the realtors, but take a broad view and try to come up with a consensus.
If that consensus is telling you that the property market might be going down anytime soon, or if the market has started already declining, then it may be time to consider selling.
3. Taxes on property start increasing
Governments like taxing property. Hell, governments like taxing everything they can. But usually it goes in cycles, depending on the government in power or coming into power.
Taxes are a normal part of the game and can’t (largely) be avoided. However, taxes reduce your investment return and wealth.
If you see that the taxes you are paying on your property start taking a bigger and bigger bite out of your total return, then it may be time to start contemplating a sale and investing the proceeds in something else.
4. You are too highly allocated in Real estate
Diversification is an art that needs to be religiously followed.
Given that properties are usually not cheap and that they usually come with a mortgage that gets paid down over time, means that property can very quickly become a large part of your overall wealth.
While property growing in value is a good thing and while having a tenant pay off a mortgage for you, an even better one, you can never accept being too exposed to one asset class for an extended period of time. That’s the wisdom of diversification.
If you find your property investments accounting for more than 50% of your total net wealth, then it may be time to consider selling and re-balancing your portfolio.
5. Management of the property starts feeling like a burden
Investment property is usually self managed. If you’re not self managing, I hope you have closely analyzed the cost-benefit of that choice as management companies are not usually cheap.
Most of one’s portfolio requires some initial work and then some regular checking as to what is going on, but it is definitely not heavy lifting.
Property, on the other hand, requires regular work and time sacrifice. Those leaky facets are not going to fix themselves and when your tenant moves out a new tenant is not going to magically come knocking on your door. In the beginning it can be exciting and fun managing a property, but that can wear off fast.
If you start finding that your property management is taking away from your other wealth generating activities and in a way that you find burdens you, then maybe it is time to consider a sale.
6. Life throws you an Unexpected Event
Investments are there to fund your retirement, but they also act as a safety blanket in case things go wrong or in case you need them.
If life has thrown you a curve ball or if you’re finding your self in dire need of the money sitting in that investment property, then that may just be the sign you need to consider selling.
Timing any market is difficult and should be avoided at all costs. Also don’t follow the herd, take the time to make your own decisions.
Knowing when to sell an investment is more of an art than a science.
Additionally, Investment Properties often carry with them sentimental values and this can make it harder to zoom in on whether one should sell or stay invested.
The above 6 signs are the ones I’ve been using as I contemplate an exit. No decisions made just yet, but they’re providing plenty of food for thought. Hope you find them useful as well.