Should I Hold or Should I Sell?

We have all heard by now that property is a long game. Basically, if you can hold it for 30 years, you will always win. The problem is always “in the middle”, it’s in that holding period will you have market ups and downs. It’s just inevitable. Economy can’t simply keep going up. At some point there will be corrections. As I would like to call it, “there is a time to build, there is a time to manage”. It’s during that “time to manage” will government spending and/or overseas investing/purchase be reduced.

As an example is this: There might be some particular years where government is spending a lot of money building infrastructure to cater for a projected huge migration or population growth. But this can’t keep going, eventually all projects will need to stop so that the government has time to manage these built infrastructure. During this time obviously jobs will be reduced and a “downturn” chain reaction towards every sector in the economy kicks in. Because there are less jobs, there are less coffee purchase, so now the coffee shop owners have to reduce their number of staff, which in turn causing them to cut back on their clothing purchase, etc etc etc. When this happens, economy is in the correction phase.

Same with overseas investing or imports. There might be particular years where countries such as China purchasing a lot of iron ore from Australia. Because of this, a lot of projects start. However, China can’t keep building. Eventually, they need to “breathe” and manage. At this point, the projects will stop and the similar chain reaction happens.

Whatever the events are, market correction will always happen. I’m sorry to break this to you, but “the next great depression” will always happen. It’s inevitable. It’s just the way the world works. We as investors however can always put strategies in place to minimise our risks. From my years being in the property investing industry, the only way for us to be able to ride through the storm is by getting ourselves ready in the first place and plan an exit strategy.

These exit strategies can be in the form of keep holding onto the properties we own, or sell them and put the cash somewhere else. So, in this opportunity I would like to share with you my thoughts on whether we should keep our properties or not. As much as I would like to live by the principle of “never sell properties”, if in the end it gives me mortgage stress then there is no point. Life is too short to be stressed!

OWNER OCCUPIER

As an owner occupier the decision to sell or to hold depends on their personal finance, and/or the price and whether you’re happy to sell at a lower price during the downturn or not. You would have liked the place you’re living in anyway when you first purchased it. Sure, it could have been better or bigger. However, it wouldn’t “kill” you should you stay in there.

We have had clients who were considering to sell in the downturn at a lower price than the price they bought it for simply because they just wanted to move to a bigger house. Period. No further questions asked.

But at the same time, we also had clients who were forced to sell just because they couldn’t afford the repayments. They were initially buying with the hope of flipping for profit. So straight away from the get go, their strategy was to hold for a short term and sell as soon as they could make profit.

We always see this strategy as a risky preposition. We don’t like to only relying on capital growth alone. The problem is, we never know when price is at the top or at the bottom. Therefore, when it goes up, people tend to hold even longer hoping that it would increase even more. But, as soon as it starts go do down, people still hold onto it hoping that it may bounce back. We call this: The Demon of Investing. This applies to any form of investing, especially shares!

FIRST HOME BUYER

As a first home buyer you have nothing to lose. When the market is at the top you might be better of renting and saving for buying either your first home or an investment property (rentvesting). We have a great webinar on this. When the market is at the bottom, you can then buy at an excellent price.

If you already live in your own place then the decision should be similar to an owner occupier. It all depends on your personal finances and/or if you’re willing to accept the sale price at the time.

INVESTOR

As an investor, the decision to hold or to sell should always depend solely on the numbers. If you own a too-negatively-cashflowed property and bleed a lot of money to hold, you might be in trouble. For me personally, I’ve ever owned an investment property which cost me $10k/year to hold. The property was purchased for $440,000. It’s a relatively small house in a mediocre suburb. Therefore, if it takes let’s say 20 years before it to doubles in value, should I choose to hold it, it would have cost me $200k. That’s a lot of money considering the price of the property. If that property is $1mil in value doubling to $2mil, the $200k losses might look very minimal.

The problem with negatively-cashflowed property is missing opportunities (and potential mortgage stress depending on how many negatively-cashflowed property you have to hold). The banks won’t lend you money if you own a money-bleeding property because they would see it as a losing business. And because of it, you can’t get a finance to buy more properties.

Let’s do a bit of math: a $500,000 property that goes down by $50,000 in value means it’s a 10% loss. However, for a $450,000 property to go up by $50,000, it needs to increase by 11.1%. As you can see, it’s harder for price to go up than for it go down. 

Therefore, in this instance, the decision should be about the numbers. When you sell in the downturn, the risk is, you will lose your initial capital. And yet, if you keep holding onto it, it might keep bleeding out money; and while you’re in the red, you can’t get finance to buy more properties, which, in the downturn is actually an excellent time to buy.

My strategy as an investor is, if the property I own is an A-grade property, I would get my property revalued at the top of the market and use the refinance amount as a buffer to weather me through the storm. Or, to get it refinanced so that the rent covers the repayments. Whatever I can do to allow me to hold onto that property without affecting my personal lifestyle.

If the property I own is a B-grade property I would try to sell to at least cover my initial investment. If I still can’t do so then I would sell for a loss. Take it as a bad choice of investment. There is no other way. I can’t afford keep bleeding money hoping that one day it would at least go back to the value I first bought it for.

CONCLUSION

Whenever possible I wouldn’t sell the properties I own. I will put strategies around them to get them protected from the storm. And most important at all, it was the selection of asset in the first place. Without buying the right property we simply fail to plan. That’s my motto in property investing.