When it comes to owning an investment property, many investors put the most effort into choosing the property, arranging the finance and organising the purchase. After the purchase settles, typically the property investor would, organise tenant selection and attend to any day-to-day issues such as property maintenance, rarely do property investors take the time to review the performance of their rental property and assess if it is doing the job they purchased it to do.
In order to overcome the inevitable fluctuations in the property market, residential property should be held for at least seven to ten years, this will also allow for the property to maximise its compound capital growth. However, every property performs differently—and not all of them perform to a degree that justifies their inclusion in your investment property portfolio over the long-term. Therefore, it is essential to assess the performance of the property every two or three years and make any necessary adjustments if it fails to come up to scratch.
Assess the growth rate of your investment property
The best way to find out whether your property is up to scratch is to determine whether it is growing in value at a rate faster or slower than the average, most often referred to as the ‘median house price’.
Arrange for several local real estate agents to give the property a current market value appraisal. Divide the average figure supplied by the various real estate agents by the original purchase price of the property and subtract one to work out the percentage increase for the period the property has been held.
Then, find out the current median value in the city the property is located, along with the median for the year you bought the property. Divide the current median by the older median and subtract one to work out the percentage increase for the holding period.
If you want to compare the growth rate of your property even further, you can compare it with the growth rate of the suburb of the property, be careful to take into consideration the amount of sold properties that have been used to arrive at the median figure, a small number of properties sold can lead to a median figure that my not truly represent the median for that suburb. By using a city-wide median you can avoid results that may biased as a result of such a small sample size.
If the growth rate of the property is greater than the median growth rate, you know your property deserves to keep its place in your portfolio. Hold tight and reassess its performance again in two or three years’ time.
If its growth rate of the property is less than the median, there is an understandable chance that this course will continue. Now, this is the time to remove all emotion from your decision-making process, you need to assess your property with a truly analytical business approach. Is retaining the property worth it, in the vague chance that the situation will improve, or will you be in a better position by selling now and putting the resultant proceeds into another investment that will provide a greater return in the longer term?
If the performance of your property is pretty much ‘even stevens’ with the median, you are in somewhat of an unclear area. In this instance, it may be advantageous to look at how much longer you are intending to hold the investment property. If you’ve already held it for seven to ten years and only plan to hold it for a couple more, time is working against you because transaction costs like agent’s fees, advertising expenses, capital gains tax and stamp duty will eat substantially into your profits. In this case, it’s probably appropriate to sell it in two years’ time as planned.
On the other hand, if you’ve only owned the investment property for a few years and plan to hold it for the long-term, time is on your side. It may be best to sell it now and reinvest your money in an investment that will work harder over the long-term.
When assessing the performance of your investment property, it is the perfect time to re-evaluate your finance arrangements. The residential investment home loan market is constantly changing, so reviewing your loan structure, interest rate and fees could save you a considerable amount of money, freeing up funds with which to further reduce your debts.
By taking the time to analyse the numbers every now and then, you will be in a far better position to make an unbiased judgement about your investment property, will it provide long-term gains, or would it be best to sell and put your investment dollars into something that will outperform your current investment.