Last week we questioned our due diligence and considered how to conduct a risk analysis that goes beyond the usual checks carried out by a solicitor and the like. In my experience, most problems can be avoided if you’re clear from the outset as to why you’re making a particular purchase; for example, considering if you’re buying a property to hold and rent out or to renovate and sell on. However, even the best-laid plans can go wrong and sometimes even the most successful investors have to cut their losses and move on.
There’s no shame in this and there is certainly no point in holding onto a property that is not performing. This is especially true if you come to the conclusion that by selling and releasing your capital, you could make your money work harder and more effectively elsewhere.
Although it is generally held to be true in property that you should never sell, just like with any rule, there are exceptions. When market conditions allow, it may well be sensible for an investor to review their portfolio and to sell the properties that are struggling to be managed at peak performance.
Making this decision can be complex – especially when you factor in the effects of tax. But despite this, if you’re able to weed out the worst performers every few years and replace them with better performing properties, then the value of your portfolio will increase significantly over time, and not just because of market forces.
Sometimes this means selling at a loss. At a first glance this may not appear to be a profitable solution, however, your tax situation may actually make this a beneficial move if you can offset the loss against a gain elsewhere.
Even if this is not the case, it’s not always wise to continue to hold a poor property just to save a few thousand pounds, especially if by reinvesting your capital you could make that money back several times over.
When this happens, as I’ve said many times over, it’s important not to let your emotions sway your decisions. A mistake I see some investors make is applying the wrong indicators to measure how well a property is performing. For example, if you have a property that has had a succession of poor tenants that default on the rental payments, you may consider selling up. But the decision to sell the property should not be based on this alone and you should instead measure the performance of the property in real terms to ensure your emotions are not clouding your judgement.
To make the right decisions it’s better to take a step back and see if there’s perhaps a more effective solution such as taking a more proactive role with the management of the property. The answer may be to conduct thorough credit checking and referencing to ensure you find the right tenant in the first place.
Or, if you purchased a property with the intention of letting it to a single family but have found that over time it has become increasing hard to rent out, perhaps you could consider converting it to a House in Multiple Occupation (HMO) and rent out the individual rooms instead. Incidentally, this may even produce a greater return than if you let it to a single family. In this instance, taking a slightly different approach is likely to turn the situation around.
By now you may be wondering when is selling up would be the wisest solution. Many experts take the view that it could be right to sell properties in a hot market so you can reinvest in a cooler market. (In other words, take your profits and reinvest them in an area where you think future capital growth is more likely). But the truth is that the answer to this will very much depend on your strategy and goals.
In my humble opinion, there are two situations that might prompt you to readdress your options.
Firstly, if your strategy is to buy and hold for income but the cash flow is poor for reasons beyond your control, then selling may be the better route to take. Or secondly, if your strategy is to buy and hold for equity but capital growth is below your target rate, then selling up might be more to your benefit.
Each investor has his or her own opinions regarding when a property should be sold but ultimately, the decision is yours. I can only advise not to make decisions based on emotions and to revisit your strategy often enough to ensure that your portfolio continues to yield the result you expect.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
PS. By the way, I’ve rewritten and updated my best selling ebook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to www.ThePropertyTeacher.co.uk/PSStrat