As with any investment, real estate has its good, bad and average performing assets and if you’re not careful, you could easily end up with a property investment lemon. The best way to uncover an underperforming asset, before it eats too far into your bottom line, is to annually review your portfolio and ask yourself some hard questions.
Michael Yardney details those in this show.
Kevin: No one wants to make a dud investment. When it comes to property, how do you know if you’re buying a lemon? Michael Yardney has been looking into this. Michael, of course, is from Metropole Property Strategists.
Good day, Michael.
Michael: Hello, Kevin.
Kevin: Michael, how do we know if we bought a lemon? What are the signs?
Michael: I guess the first thing you should do is review your property portfolio every year and ask yourself some hard questions. The questions I’ll be asking myself are “Is this property performing like I expect it to?” I’ll be asking “Is it outperforming the market?” because at the moment, rising tide lifts all ships in some of the big capital cities.
I’ll be asking myself “If this property were on the market today, would I buy it again?” I’d be looking at it and saying, “Is there anything I could do to improve my property so that it can generate more return, more income?” The last question I’d ask myself is “Is this the sort of property that’s going to outperform the market? Is it likely to do well in the long term, in the next decade or so?
In my mind, the answers to these questions will help you decide whether it’s the sort of property that you should be keeping in your portfolio or not, Kevin.
Kevin: One of the important questions I’d like to ask you is what makes a property underperform?
Michael: There could be a couple of things. The first thing is you could buy at the wrong time of the cycle. This is maybe when values aren’t going to go up much or that they’re near their peak and they’ll be languishing for a while. It could be timing.
It could be the price. If you pay too much, you’re likely to have to wait a couple of years for the real value to catch up. It could be the location. Some locations are just going to underperform. In my mind, 80% of the performance of your property is made up by the location. And it could be the property itself – in other words, just poor property selection.
What I’d be suggesting is you look at those, because if you bought the right property but at the wrong time or paid too much, Kevin, generally you’re going to find real estate is forgiving and time will work on your behalf, and eventually, it will be okay.
But if you bought the wrong property or in the wrong location, that’s when you have to look at it more seriously. You maybe have to bit the bullet.
Kevin: I want to talk to you about biting the bullet and how you get rid of it. Before I do that, can I ask you, is one of the reasons why a lot of people buy a lemon because they don’t have a plan?
Michael: That’s a good point, because they don’t even know what to judge it on. You have to go right back at the beginning and have a strategy and understand, is it capital growth that you’re looking for? Is it cash flow? What sort of capital growth are you expecting?
Realistically, in this market, it won’t be as strong as a couple of years ago, so you’re right, Kevin, they have to know what they’re looking for and have some parameters to judge against.
Kevin: Selling the lemon: one thing is about recognizing it and then getting rid of it. I read an interesting blog – off-topic for a moment, but I suppose it is the topic – where a well-known commentator was suggesting that if you’ve been holding on to a lemon in one of those mining towns that we know so much about, Michael, maybe you should hang on because there’s a better time ahead. Is there a good time to sell one of these?
Michael: I guess by the time most people recognize, they’ve already suffered a lot of opportunity cost. People say to me, “It doesn’t cost much. I’m actually getting some rental coming in.” The cost is the opportunity cost – what else could you have done with the money?
Selling also comes at a cost of paying sometimes some capital gains tax – often, there isn’t any – or paying stamp duty on their next property. Yes, Kevin, you often have to step one or two steps backward to move forward.
But hoping that those mining towns are going to come around again, in my mind, it will not happen in your lifetime or mine. The fact is there are property cycles, but in some parts of the world and in some parts of Australia, the cycle between one peak and the other is so long that it’s just not worth waiting for, Kevin.
Kevin: The bottom line, Michael?
Michael: If your financial capacity is that you can only afford to hold – I don’t know – three or four properties, you should aim to own the best properties, the best assets you can. I know there are times when the market is flat and you may not get the price you want, but waiting to take action until the market picks up is only going to increase the gap between your under-performing property and those with stronger properties that are going to perform much better.
Essentially, the sooner you identify and offload your underperforming property, the better. Then you can just get on with it, because it’s a financial drain, but often, it’s also an emotional drain on you, isn’t it?
Kevin: It is, indeed. Wash your hands. That’s your advice?
Michael: Yes, wash your hands with lemon.
Kevin: Good talking to you, Michael. Thanks for your time.
Michael: My pleasure, Kevin.