How to determine if your property investment is underperforming

By Cam McLellan

It’s the New Year and if you’re already an investor, it’s probably time to take a step back and reassess your investments. Whilst my strategy is hold, hold, hold, if you have an underperforming asset, in order to be a successful investor you must be able to know when it’s time to let go.

Early in my portfolio growth period I got to a point where I had used all of the equity I had and all of the capital I had and bought all of the property I could. I was just moving out of a property in Melbourne and I knew it was going to be a terrible performer over the next five years.

So making the decision to sell comes down to basic maths, it is a pretty simple equation; you need to consider whether selling will free up equity that you can use to go and purchase another property. It is a matter of working out what the sales costs are going to be, including capital gains tax, agents’ fees, marketing and checking that amount against the growth that the property could potentially have over the next five years. Now analyse this figure versus taking your money out and putting it into another capital city market which will have better growth.

I was discussing this topic with a friend a few weeks ago. It began by him asking how I kept finding topics to blog about. Here’s the thing, so much of the information on investing loops back and is interrelated to other topics. In the past I have covered whether or not to make your home an investment property and this links back to the MAP process (check out our website for more on this). So you can work out whether a house is good enough to be an investment property by asking yourself, “is the market right? Is the area right? Is the property right? Am I going to get the right rent? Is it the right size? Am I going to attract the right tenants?”

It all comes back to what I’m talking about today – underperforming assets. You can use MAP to work out whether to hold or sell an underperforming investment property. If your investment is currently in a suburb that doesn’t have any growth potential (lack of infrastructure going ahead and employment generators) you should be thinking, maybe it isn’t the right one. Compare the numbers against agent’s fees, capital gains tax and marketing and consider if you will make it back by purchasing a different property; there is probably a pretty good chance you will. There’s a good chance of the right property doubling in value in 10 years, versus a property which is sitting still and underperforming.

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