In a perfect world, all of us would buy property investments at the bottom of the market, sell at the top and wait for the cycle to repeat itself. History shows that cycles do repeat themselves in investment markets as well as economies. However, in the real world, is there ever really a right time to completely liquidate your property portfolio?
Markets are volatile animals
To show the volatility and uncertainty of property markets we only need to look at the Brexit situation. Prior to the Brexit vote in 2016 even the Bank of England issued a potential doomsday scenario suggesting the market would collapse overnight in the event of a leave vote. More than two years on, as we approach D-Day for Brexit, markets are showing signs of weakness but there has been growth over the last two years. If you had taken the decision to liquidate your property assets in light of the Brexit vote you would be kicking yourself today.
This example perfectly reflects how, depending upon the size of your portfolio, it is always sensible to hold some long-term investments while maybe tinkering with a percentage of your portfolio in the short term.
Those who focus purely and simply on capital gains and ignore potential rental income are the ones most at risk from volatile markets. In the good times it is possible to make a significant return on property assets but once the market turns when do you bail out? We have seen far too many property investors crash and burn, waiting for the market to turn upwards so they can reduce their exposure.
Even those more focused on capital gains should at least take some account of rental income which can help to cover finance costs until a sale can be completed at a reasonable price. The fact that the UK private rental market is still extremely strong shows the potential to create long-term rental income streams. Those who focus on long-term buy to let assets tend to be less trigger-happy when it comes to buying and selling assets on short-term considerations. If you take a look at some of the best property investors in the world, they all have one thing in common, a long-term investment strategy.
Purchase and selling costs
If you take into account stamp duty and legal costs when buying and selling property these can start to add up. Therefore, each time you sell your assets in the hope of buying back at a lower level you will need to take into account two sets of costs. This means that relatively small price falls could potentially leave you out of pocket if you decide to trade assets. It is highly likely that over the next few years we will see more property related taxes which will also need to be taken into account. As with stocks and shares, and any other asset, there are entry and exit costs which need to be taken into consideration when trading – simple buying and selling prices are just the starting point!
When to get back in
It is all good and well pulling the trigger on the sale of property assets, banking a profit and looking to buy back in at a lower price. Even if markets do fall significantly, when do you get back in? Do you drip feed your money on? Do you invest all in one go? What type of assets do you look for?
As bizarre as it may sound, in many ways those looking to trade property assets will find it easier to bank sale proceeds than they will to get back into the market. There may even be a situation where you should consider buying back into a market at a higher level, as the economic outlook has changed, which may go against the grain. We have seen this in stock markets; the US market was being talked down in light of Donald Trump’s presidential success but markets kept on rising.
Eventually, all of those analysts who had predicted a sharp fall in the market began to change their opinion, prompting investors to reinvest at higher levels than they had bailed out. The simple reason was prospects had changed and there was more upside than downside.
In a perfect world we would all buy into the property market at the bottom of the market, sell at the top, bank our profits and wait for the cycle to repeat itself. Unfortunately, it very rarely works like that and those with a long-term investment strategy, with minimal tinkering around their property asset backbone, are the ones who tend to create the largest returns on investment in the long term.