Property Portfolio Reviews Important
Selling or replacing a low-yielding property for a high yielder can make you a better investor, writes Mark Withers
1 April 2015
When was the last time you really stopped to run the ruler under your investment property portfolio and asked, “Am I getting an adequate return on my investment?”
Many property investors are guilty of focusing on the next acquisition they might make rather than first reviewing the properties they already have in their portfolios.
You might ask: Why is this important? In short, opportunity cost. Holding on to one asset means giving up the opportunity to invest in others. If you review your property portfolio regularly, you can identify instances where the rate of return you receive has dropped over time to a point where it makes you question whether it is worth holding on to the property.
This is often a counter-intuitive exercise because property investors look to enjoy both rental income and capital growth over time. Often the property investor will describe their best property as that which has appreciated the most. However, the appreciation in the property’s value is often not matched by increasing rental incomes.
This means that over time the rental return relative to the value of the property might have declined. In some cases where properties have been held for long periods and are now in highly desirable inner city suburbs, rental yields have fallen as low as 2% or 3%.
When reviewing a rental yield it is necessary to remove those rose-tinted glasses and take out of the rental income all the costs associated with holding the property. These include rates, manager’s fees, insurance and repairs.
This will determine a net income derived from the property. Compare this then to the current market value of the property to determine the net rental yield.
A good rule of thumb when determining if this rental yield is adequate is to look at the cost of funds you may have associated with debt funding the property investments.
Right now, interest rates are around the 5% to 5.5% or the 5.5% to 6.5% mark. If the net rental yield of properties in your portfolio has fallen below the cost of funds there is a definite opportunity cost to retaining them.
One final sanity test is to look at the property as if you don’t already own it. Ask yourself, “Would I still buy the property at today’s market value relative to the amount of money that it
Capital From Property
If it no longer fits your criteria for a fresh acquisition ask, “Why am I continuing to hold it? Would it in fact be better to realise the capital from the property and make an alternative investment?”
This could involve simply reducing debt in the portfolio or looking at fresh acquisitions that may produce better income yields.
It’s fair to say that as people age and look to retire, the actual rental income that delivers their lifestyle should perhaps be considered more important than capital gain expectations.
Remember also that adjusting a property portfolio does not mean you are becoming a property trader. I would argue that selling a low-yielding property and replacing it with an alternative high-yielding property or simply reducing debt, just makes you a better investor.
Mark Withers is a director of accountancy
firm Withers Tsang &Co.
Often The Property Investor Will Describe Their Best Property As That Which Has Appreciated The Most– Mark Withers