Why sell an investment property when it costs nothing to hold?

Posted by Luke Graham

In 2019, Blue Wealth Property celebrated our 10th anniversary. In an ideal world, every one of the hundreds of properties we’ve recommended over this time would still be held by our clients. The property market has changed a whole lot since we started. Australia skimmed by the global financial crisis and its aftermath, a minerals boom and contraction, as well as multiple market booms, stagnations and corrections across the country. The RBA cash rate plummeted from 7.25 per cent to just 0.75 per cent. There have been changes to the construction industry, banking and finance, as well as our very own research model. The Australian population grew by 18 per cent, from 21.7 million to 25.6 million.

Despite all these changes, at least one thing has remained the same: holding your property for a longer period of time makes it more likely you’ll sell it for a comfortable profit. Although this has been our message from the beginning, it was in 2014 when we extracted some data to quantify it more clearly. According to the CoreLogic Pain and Gain report of the day, property owners were ten times more likely to double the value of their investment if they held it for ten years or more. Fast forward to now and the story remains similar. Prematurely selling an asset makes it much more likely you’ll lose money. According to a more recent CoreLogic Pain and Gain Report, Sydney houses sold at a loss are held for a median of just 2.7 years. In Melbourne, it’s just two years.

Regardless of the frequent messaging from us and even some of our competitors, hordes of property investors still sell prematurely. There may be good reason for some. Perhaps a divorce, unexpected medical expense or extended period of unemployment forced their hand. For many, however, it is based more on emotion than rationale. What makes this decision even less reasonable is the fact that after tax, many property investments would yield neutral or positive cash flow, meaning it costs little-to-nothing to hold.

In a recent Melbourne development project, our clients achieved an average rental yield of 5.02% for 1-bed apartments. With many lenders passing on the three most recent rate cuts, a fresh suite of depreciation offsets and such a strong rental yield, these property investors are well equipped to hold their asset without adversely impacting monthly cash flow. A similar rule applies to Brisbane. Although the city has been experiencing a longer-than-anticipated stagnation, strong levels of cash flow enable patient investors to await stronger performance. On the other hand, if they were impatient enough to sell during the credit crunch of 2015-19, they just might have sold for a loss.

As many economists begin to express optimism for Australian markets from 2020 onward, it appears that we are moving into yet another phase of the property cycle. As always, the longer we are able to patiently sit through the ebbs and flows, the more likely our property investment endeavours will be rewarding.

The more things change, the more they stay the same.

Posted by Luke Graham, on 13th Jan 2020