- Underwhelming properties can drag down portfolios
- New inner-city units are often the culprit
- Sometimes better to offload and redeploy capital than keep
When we meet new clients who may have been investing for a while already, they often have a few things in common.
Usually, they are struggling to find the time to strategically add to their portfolios, because they understand that it takes plenty of research to select a location primed for future capital growth.
Often, they may be struggling to add to their portfolio at all and are a little perplexed at the reasons why.
Perhaps, as far as they can tell, they should be able to finance another property, but when they speak with a broker or perhaps their bank, they are not hearing the same positive sentiment coming back to them.
Often, this is because one of their properties hasn’t increased in value, their mortgage hasn’t reduced, or their serviceability has taken a dive.
This is sometimes because they have a property in their portfolio that is like an anchor, which is weighing down their opportunities.
It could be one that they purchased at the start of their investing journey, when they potentially didn’t know enough to strategically make a sound decision on location or dwelling type.
Over the years, that property may not have cost them much to hold, but it hasn’t grown much in value either, which can be particularly problematic if it has been on an interest-only loan as well.
Wrong dwelling or location
One of the most common examples of this type of property is a unit in a high-rise development in the inner-ring of many capital cities.
The snazzy marketing and slick sales-talk that enticed them in the first place has (alas) been replaced by the bad taste that follows when the unit stubbornly doesn’t increase in value by any great degree over the ensuing years.
This is usually because there was a sharp increase in the number of these cookie-cutter types of units that were constructed around the same time, and for many more years after, and we know that supply is the enemy of capital growth.
The truth of the matter is that these types of “anchor” properties can really hold back investors from creating a strategic and sophisticated portfolio.
Of course, none of us like to admit that we may have made a mistake, which is why so many investors hold on to these properties for much longer than they should.
Often, they are holding out hope that the market for high-rise units will eventually blossom and their property pain will be turned into gain.
The reality is that, yes, these properties may one day be worth a bit more than they paid for them – but it could well be a decade or even longer until that day stubbornly arrives.
In the meantime, they may be stuck on the sidelines without the ability to strategically add to their portfolio at all, because of this one anchor weighing them down.
One of the strategies that we regularly use for our clients is redeploying capital so that it is working harder for them.
Sometimes, this means that our clients will need to be honest about which properties they may have in their portfolios that have weak capital growth prospects – and these aren’t necessarily just high-rise units either.
Once we have objectively reviewed their portfolios together, they can then make a strategic decision whether they should keep holding and holding until that magical day in the future (that may or may not happen) or whether they should jettison that property to enable them to deploy their capital elsewhere.
Of course, none of these decisions are easy ones to make, but it does reinforce how important it is to do your very best to purchase strategically in the first place.