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When investing, most people concentrate on the 'deal' they are getting and whether it works in today's market. However, since the property price falls of 2007 left many investors who wanted to cash in for their retirement in dire straits, and with the demand and supply of property likely to change in the future due to demographics, it's essential to have a good idea of when is the right time to sell your investments.

If you were investing in a financial asset, you would typically do this via a regulated, independent financial advisor. They would then give you projections of what your investment would deliver to you. For example, if you invest in a bond, you are likely to receive information that shows what you would receive after 5, 10, 15 and 20 years. To do this they would project probably three percent growth projections such as 3%; 5% and 7%. Much of this information is regulated, so they are not allowed to 'make up' figures.

As an investor, you should have a plan of what your property investment will return ongoing in income for example, as well as capital growth. This should work hand in hand with your exit strategy.

For example, if you want to buy property now, hold on to it and rent it out for five years, then cash it in, what you need to know now is: –

1. What capital growth do you need to break even, make a good profit, or make you a fortune?
2. What income does your investment need to return?

You need to also work out what's more important – capital growth to cash in your investment and spend / use the cash, or a constant income stream, possibly to supplement your pension.

Once you've gone through this process, you can then check this against various options. For example, when looking at property price growth, you can do three things: –

1. Apply the long term average property price growth to your property which ranges between 3, 4 and 5% depending on which years are chosen.
2. Look at local forecasts from estate agents / property investors etc., see our property market report for more information on companies that provide these. Currently both Savills and Knight Frank are giving long term forecasts.
3. Subscribe to property forecast models such as 'Property Forecasts' to give an 'extra' opinion.

Or you could just do it yourself and decide on your own expectations and then track how well your property performances against these forecasts.

It's important if you are renting out the property to do something very similar, but it's more complicated than projecting property price growth as there are more variables to consider including: –

Mortgage Rate Changes

Firstly, work out what your break-even point is. Is it mortgage rates at 5%, 7% or 10%? Then you will need to talk to a finance expert to work out if it's best to work with the market if it's fairly stable and keep your mortgage on flexible rates, or even if it might be better to fix a mortgage rate. It's not wise to make this decision alone, so ensure you have a really good IFA or wealth manager to help advise you on the right decision for your personal circumstances.

Inflation Changes

Few investors realize the impact of inflation on their rental income, but it's huge. If inflation is running at 3% per year, pushing prices up, but your rental income is going down by 5%, then you are actually losing 8%. Of course the opposite is true, but typically rents do not go up that much and at the moment (2009) they are actually down by around 3-5%.

So make sure you know and track what's happening with inflation rates versus your rental income.

Your Rental Income versus the Market

Ideally if the market rents are falling, you will need to find a way of improving your rental income year on year to buck the trend. Know where your property is 'recession proof' due to its location or a constant shortage of your property type.

The other thing that you'll need to do is make sure you know what all the costs are (including tax you'll have to pay) when you sell your investments. This is also another thing you'll have to predict. Currently you pay 18% tax on the capital gain when you sell a property (but you can mitigate some of this if you seek professional, specialist property tax advisors). However, with the large debt hanging over the country, what impact would it have on your returns if this was back to the 40% it used to be?

Once you've done your predictions and know your break even and profitable points, then you can set yourself targets for when to sell your investments which might look something like this: –

Property One: Expecting £ 40,000 capital growth and £ 250 per month net income

Once it's hitting the target of capital growth, you can decide whether it's a good idea to sell. If however the net income is falling to £ 50 a month or even costing you money, should you sell up and re-invest your money in something else that does deliver?

Property Two: Expecting £ 20,000 capital growth and £ 600 per month net income

With this property it's the income that's really important, so at what point would you sell up or would you hang onto this property as long as it delivered the income, even if it did not grow in value or fall in value?

Investors that work on this kind of forward thinking and contingency planning are the ones that are most likely to survive these turbulent times and take advantage of the upturn – whenever that may be!



Source by Kate Faulkner

Author: admin