Selling One Property to Buy Another - Is It a Good Idea?

At one time or another, almost every investor will find themselves wondering whether they should keep their current investment property or sell up to secure a better performing one. Is the grass really greener on the other side, or should investors stick with what they've got?

This scenario is a common one and often comes about because the investor feels they haven't received a sufficient return on their current investment or because they want to buy in another "hotspot" area and can't afford to hold both investments. They're looking for property that perhaps has better money-making potential at a faster rate of growth. So, which of the two courses of action - to sell or to hold - is going to deliver the best outcome? At first glance you may think the answer is obvious. But is it?
I believe the buy-and-hold strategy is the surest way to wealth creation through property (not to say that there isn't a time and place for other methods). However to successfully implement this strategy, you must resist the temptation to sell. With the above scenario, my general advice in nine out of ten cases is to actually hold the existing property. When you add up the transaction costs in selling and then buying, and the price you can afford to pay for the replacement property, the figures usually don't stack up. At least not for a long time anyway.

Let me give you a fairly simplified example of why you should rarely sell (please note figures are estimations only as various transaction costs alter from state to state).

Assume that you own an investment property worth $400,000 that you purchased for $200,000 (inclusive of all buying costs such as stamp duty etc) 10 years ago. Let's say it's expected to generate 6% per annum capital growth. In 10 years' time this property will be worth approximately $716,000.
You may think you will be able to generate a better capital growth rate of about 8% per annum if you purchase in another area, so you consider selling this property. If you sell the property for $400,000, you will attract standard expenses of real estate agent fees, advertising costs, and legal/conveyancing fees. Depending on where you live, these could equate to around $15,000 all up. This leaves you with $385,000. You will also have to pay capital gains tax on the gain of $185,000 ($385,000 - $200,000), which let's say is about $41,000 at the discounted capital gains rate of 22.5% (50% discount applied to the top marginal income tax rate). This will now leave you with $344,000. Now to purchase a new property, you need to allow for standard expenses including stamp duty, legal/conveyancing, and inspection costs. Let's average these at a total of $15,000, again these will vary depending on where you live. With what's left you will probably be able to purchase a property for around $329,000.

Let's assume you find a property for $329,000 which does generate 8% per annum on that new property purchase. In ten years' time, this new property will be valued at around $710,000, LESS than the value of the original property if you had kept it. So even after ten years, you would have still been better off with your original property. It will actually take 11 years for the new property to grow in value more than the value of the property you sold to make the whole situation worth the effort.
And this whole process, in terms of transaction costs for buying and selling, cost an average of $70,000! You'd be better off holding your existing asset and if you could afford to, leveraging the equity in the property to fund your next investment property when you're ready. Instead of blowing that $70,000 on expenses which leave you with nothing to show, use it to invest further.

Generally speaking, I think there are really only three situations in which you should sell property assuming you have a choice. The first is if the neighbourhood is declining. Increased crime and other unsavoury activities which decay an area, may indicate your investment will no longer be a good investment in years to come. Secondly, selling is okay if you are ready for retirement and selling part of your portfolio is your strategy to derive an income. And lastly, if you truly believe that you can generate significantly superior returns elsewhere. As you can see in the previous example, even a few percent per annum might take ten years or more to generate enough return just to break even. You need to be talking about more than just a few percent per annum to consider selling.

Of course, if selling an existing property wasn't part of the equation, then I would certainly advocate buying property that is likely to deliver the best rate of growth compared to another. Using the previous example of a $400,000 investment at 6% per annum versus the same investment at 9% per annum, over 20 years that relatively small 3% difference equates to almost $1 million in extra value than the 6% growth alternative.

Yes, it can certainly be tempting to sell, especially if you feel your current investment isn't performing as well as it should. But as you can see, the grass isn't always greener on the other side. For more information check out http://www.momentumwealth.com.au/

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Capitalising on Demand and Supply

As a property investor seeking maximum rental and capital growth, you need to invest in property which is high in demand, yet also has limited supply. So what drives demand and supply in real estate?

When assessing property for potential investment, it is essential to pay attention to demographic and social changes that influence where people want to live and what kind of property they want to live in.
An example of social change is the lifestyle preferences of today's Australians. Collectively we tend to view ourselves as more sophisticated than we did a couple of decades ago. The "I culture" is proving to be popular, as is the attraction to reside in locations near water. Investors would benefit from capitalising on these preferences by investing in property near "I" strips, close to rivers, beaches or harbours, and in inner city locations rather than rural locations.

Another factor which is responsible for driving demand is demographic trends. Many baby boomers have the view that the prosperity they have worked hard to create is for spending on lifestyle. As a result, many are trading their large suburban homes for smaller lifestyle-oriented properties located close to the ocean or near caf strips. Many "generation X-ers" are also motivated by lifestyle - generally they are delaying marriage and family to allow themselves to achieve their goals. Single person households are also on the rise. These demographic phenomena point to smaller, lifestyle-oriented dwellings being in high demand over the coming years.

A rise in professional, dual income households with no children or fewer children later in life heralds an emerging group with money to spend on ensuring that they live close to good amenities, including transport, schools and the workplace. However, close proximity to transport and the workplace will become less important as the trend to work from home and spend less time at the office continues to grow.

When considering factors which drive demand, investors should ideally look for properties that appeal to both owner-occupiers and tenants. Bear in mind that these days, many of the features of a property that are valued by owner-occupiers are also sought by tenants. Bedroom size, a usable kitchen, storage, car parking, and other such features are just as highly valued by today's tenants who will pay good rents for these features.

Most investors consider demand when assessing a potential investment, but fewer consider the supply side of the equation. Oversupply has the potential to jeopardise that important growth you are looking for when investing in property for the long-term.

Essentially, you should think about how easily your investment can be replicated by others, or in other words, how much competition your property will have. In any market, where there is high supply of a commodity (your property), potential consumers or users of that product enjoy more choice - therefore your ability to command a premium price is reduced.

Areas on the fringe of suburbia, with large tracts of undeveloped land nearby are a good example of this. It can be difficult to achieve a high price for a property in such an area when similar properties are readily available in new land subdivisions nearby. It would be better to have a property in an established area with high demand and little room for expansion. Similarly, high-demand areas that are "land-locked" by hills or bodies of water can limit future supply and put upwards pressure on prices.

It is also important to keep track of zoning regulations in the areas you are interested in investing. Residential zoning is used by local governments to regulate housing density. If a locality you are interested in is zoned to allow high-density apartments or townhouses, there may be too much supply, or potential supply of these types of dwellings to give your investment the growth potential you seek. It is very easy for others to build properties much the same as yours nearby.

When we look at supply factors in identifying suitable property candidates for clients, we identify areas in which there is likely to be little competition - that is look for properties with unique, highly valued features, avoid areas in which there is a lot of free land for expansion and keep an eye on zoning and development issues. For more Details visit http://www.momentumwealth.com.au/.

Article Source: [http://EzineArticles.com/?Capitalising-on-Demand-and-Supply&id=6559254] Capitalising on Demand and Supply

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How to Find a Property - Knowing Your Market Area and Market Value

There are 6 key methods which you can use to find a property but before you actually start the search, it is imperative that you know the market area to be a successful investor.

To fully understand the market you'll need to narrow your focus to a few selected areas as your target point for purchasing investment property. Because of the number of properties on the market available in any city you simply cannot know the entire city market. In fact, in the larger cities the average investor with limited time will be doing well if they have a good grasp of only one or two percent of the market.

Based on your analysis of the demand and supply issues in each city you should be able to narrow your focus down to a few selected areas. You'll need to do thorough research in these areas before choosing a property to purchase.

You must know what prices properties in your target area sell for. You need to be able to walk into a property and know within 5% what it is worth and what it would rent for.

When it comes to understanding the property market, there is no better way than old-fashioned foot-slogging. You need to get out and visit home opens, look at rental properties, and be aware of the market so that when an opportunity arises you will be able to seize it.

Astute investors always keep a careful eye on property values in the areas in which they are interested in. This way, they can avoid paying too much for a property and can always be in a position to distinguish a bargain.

So what is market value? In general terms, the market value of a good or service is the price at which a willing, but not anxious, buyer will pay to a willing, but not anxious, seller for that good or service.
For products which are plentiful, transacted often, and are largely the same as each other, determining market value is relatively easy. But property is typically not like this. Each property tends to have features that make it unique in the market - its location, size, age, etc. Even two properties side by side on the same street will be valued differently if they differ in size or age. To make things even trickier, property is typically not transacted very frequently, making it hard to compare a property you are interested in to a similar one that has sold recently.

Fortunately there are a number of information sources available to make your estimates of market value as accurate as possible. It's also a good idea to drive through the neighbourhoods you are interested in and check with real estate agents the prices that recently-sold properties fetched.
There are many situations in which a property can be purchased under the market price and if you are able to get a good estimate of market value you will be able to identify the bargain buys. For more information check out http://www.momentumwealth.com.au/

Article Source: [http://EzineArticles.com/?How-to-Find-a-Property---Knowing-Your-Market-Area-and-Market-Value&id=6554153] How to Find a Property - Knowing Your Market Area and Market Value

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Why the Median House Price Alone Shouldn't Be Trusted

The reporting of changes in the median house price causes many people anxiety and creates sensational headlines for the newspapers. But is it really an accurate way of measuring movement in house values?
For as long as I can remember, median prices have been used as the barometer for measuring real estate values. While I believe tracking of the median price has some general usefulness, I think too many people rely on it as an indicator of true house price values.

Firstly let's look at how a median price is calculated. The median house price is essentially the sale price of the middle home in a list of sales where the sales are arranged in order from lowest to highest price. So in a list of 9 sales, it would be the sale price of house number 5 which has 4 lower priced sales below it and 4 higher priced sales above it. This is different to the average which would be the total value of all the house sales, divided by the number of homes sold. Technically speaking, the median is thought to be more accurate than the average because it is less affected by a few unusually high or low sale prices.

Let me now demonstrate why a change in the median price shouldn't be used to automatically infer a change in the value of properties.

Let's assume there were 5 house sales in an area as follows: $455,000, $520,000, $550,000, $560,000 and $615,000. In this instance, the median would be $550,000. Let's now assume that a year later 3 of these same properties go back onto the market and are resold for the exact same price from a year earlier. Those properties are the ones with a price of $455,000, $520,000 and $615,000 from the prior example. With these 3 sales, the median price is now $520,000. That's $30,000 less than the median price a year earlier. However, as you can see, each of these individual houses did not lose any value when they were re-sold. While this example uses just a small amount of sales which statistically would not be reliable, it does plainly illustrate why the median price should not be used as a gauge for movement in house values.

In my opinion, the median price is best used to indicate the composition of sales rather than a change in value of properties. This is particularly true when looking at median prices for suburbs where there is a greater variance in housing stock; suburbs where there are small freestanding homes on small lots to mansions on large lots, or a mix of both old and un-renovated properties, with new and renovated properties. Take Maylands for example, where prices for freestanding homes could vary from around $600,000 to $3,000,000 because of the broad range of housing. A lowering of the median price in an area such as this really just indicates that there are more sales occurring at the cheaper end of the market then there are at the expensive end. It does not mean that the suburb has necessarily lost value or that someone selling their property in the area would be selling at a price less than what they could previously attain. The median price quoted for these suburbs is generally more misleading than that of suburbs with greater homogenous housing and therefore similar pricing.

Capital city median prices are a particularly poor indicator of property values, yet these are the ones that always hit the news headlines. If you were to hear that the Perth median house price fell by 10%, do you think it would be right to assume that every single house in Perth has dropped in value by that figure? Of course not. Instead, one should see this figure as evidence that there are simply more sales occurring at the cheaper end of the market then there were previously.

The other point I would like to raise is that the property market is not just one market; it is made up of multiple markets each with their own sets of unique characteristics. Even if you looked at the median house price of Perth as a yardstick for property values and heard that it had dropped by 10%, it would be ridiculous to assume all suburbs have suffered the same drop in value. What would be a more realistic inference is that some suburbs (and indeed individual properties) are still continuing to do well and have grown in value, while others have done the opposite. It's just that those that have done the opposite are either greater in number or greater in their percentage drops, which brings down the median price.

Statistically, the calculation of the median price itself can even be questionable. What one data agency quotes as the median price is often different to the next and the next. This is because each agency may use different data and apply a different methodology to get their results. Many don't filter out unusual sales either (like homes sold to a family member below market value) which skew the results. This can be particularly problematic at a suburb level in areas where there are not huge amounts of sales. When you pick up the newspaper and see a startling headline about a drop in median prices, which data agency have they sourced their information from? What are the other data agencies figures reporting; perhaps it's a rise instead? With all this variance, it's impossible to know who is right and who to believe.

While I do believe the median house price is perhaps one of the better ways we have to track the market in a broad sense, I don't think it's an accurate way to measure movements in house value. The only foolproof way of doing so would be to track individual re-sales of properties (which I expect would be extremely difficult on such a large scale). As an investor, it would be much wiser and more accurate to pay less attention to the median house price and instead investigate 'like for like' recent sales evidence in your area to estimate current property values.

While I do believe the median house price is perhaps one of the better ways we have to track the market in a broad sense, I don't think it's an accurate way to measure movements in house value. The only foolproof way of doing so would be to track individual re-sales of properties (which I expect would be extremely difficult on such a large scale). As an investor, it would be much wiser and more accurate to pay less attention to the median house price and instead investigate 'like for like' recent sales evidence in your area to estimate current property values.

Jude Coleman is a investment property consultant working for momemtunwealth.com.au, a Property Investment firm based in Perth, Australia

Article Source: [http://EzineArticles.com/?Why-the-Median-House-Price-Alone-Shouldnt-Be-Trusted&id=6549891] Why the Median House Price Alone Shouldn't Be Trusted

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