A decision to sell a long-term asset such as a property can sometimes be challenging for an investor, and more so for a novice investor.
When recycling equity as a strategy, it is essential to take into account the costs involved in selling and acquiring a new property and whether the returns will be better in the long-term.“Every property investor will be confronted with this question at some point in their investment journey. Therefore, knowing when to sell or hold your investment property is essential when building a portfolio,” says Praven Subbramoney, CEO of Private Bank Lending at FNB.
“Due to the long-term nature of the property investment journey, the general rule is that property should at least be held for five to ten years to allow the investor enough time to study market conditions and further assess the viability of their portfolio,” he adds.
Subbramoney unpacks some of the reasons why investors end up selling their properties:
- Exit strategy – some investors venture into property having already developed an exit plan, which consists of selling the properties and using the funds for alternative business interests.
- Recycling equity – this involves selling a property and using the equity to buy a better performing one. When going for this strategy, it is essential to take into account the costs involved in selling and acquiring a new property and whether the returns will be better in the long-term.
- Poor performance – if a property fails to provide good rental yield and capital returns for at least five to 10 years, it may be considered to be performing poorly and eventually be sold.
- Diversification – property investors may sell some of their properties to unlock capital and diversify their financial risk into another asset class, such as listed equities.
- Deteriorating neighbourhood – selling property due to unfavourable changes in the neighbourhood is common for inexperienced investors who did not conduct proper research when acquiring the property. This could also have been the investor’s former place of residence, which they decided to rent out after moving out.
- Life-changing events – major life-changing events like getting married or having children may lead investors to sell their properties and seek a new direction in life.
- Market timing – new investors who do not adequately understand how the property cycle works may be tempted to sell when market conditions seem unfavourable.
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