Signs It’s Time to Sell An Investment Property
Discerning investors get into real estate investment because it is one of the best ways to build wealth. While property investment has the potential to deliver excellent returns, it also comes with inherent risks. When future prospects are not as rosy as you would want them to be, a common exit strategy would be to sell the property.
In Dubai, people are mostly investing in apartments, townhouses and villas in Dubai. How will you know that it’s time for you to sell? Here are some of the warning signs you need to look out for:
When cash flow is consistently negative
One of the ways to determine a property’s investment quality and profitability is to look at cash flow. Every seasoned real estate investor knows that positive cash flow should be one of your ultimate goals. Ideally, your property should be generating more money than what it costs you to hold on to it. Simply put, when the property is making money, even if it’s only marginally profitable, then cash flow is positive.
Keep in mind that a temporary slump does not necessarily mean your investment is headed towards failure. Exiting the market at the first instance of poor performance is not a very wise investment decision. When looking at cash flow, also factor in perceived changes in the market that can stave off the urgency of selling a property. For example, experts have predicted that the run-up to Dubai 2020 will allow the real estate sector to slowly gain momentum in preparation for a new phase of growth. The influx of tourists and economic migrants bodes well for future rental yields, particularly for those with properties in sought-after locations. If you are experiencing cash flow challenges but can afford to ride out the slump, hold off on selling and wait for a much better time to get maximum returns on your investment.
If for some reason, negative cash flow becomes chronic and consistent and the future prospects look grim, consider this as a compelling indication that it’s time for you to sell.
When there’s a steady decline in capitalisation rates
Capitalisation rates or cap rates can be useful in determining property value by giving an estimate on potential returns based on the revenue being generated. It is calculated by examining total revenue gained from the property and then deducting your operating expenses. The figure you get will be your net operating income which you will then divide by the current cost/market value of the property. The end result is your cap rate. A healthy cap rate is somewhere between 5–10%.
You will be able to assess if a property’s performance is improving or declining by periodically checking capitalisation rates. The operative word here being periodic as the market in Dubai is frequently wrought with price changes and fluctuating rental rates. Very low cap rates can be attributed to increased operating expenses (higher maintenance costs, tax increases) or a dwindling income (vacancies, falling rents). A steady and persistent decline is a tell-tale sign that the property is a failing investment. If the percentage is less than 5%, conditions look less than ideal so you may want to consider selling it.
When the property is too difficult to manage
Difficult tenants, maintenance issues, frequent turnovers — managing a rental property is barely a walk in the park. It can become problematic if you’re rarely able to set foot anywhere near your property. Being a long distance landlord can create a lot of headaches, as it can affect your ability to address complaints and other tenant problems that may require your immediate attention. Since you are handling everything from afar, you have less control over managing your property.
You might get caught in a predicament once you realize that you’ve outgrown owning your property or have come to the conclusion that you’re not cut out for property management. If at a certain point, you realize that it has become a major source of stress and the income generated is not sizeable enough to make all the stress worthwhile, it may not be very sensible for you to hold on to it. Once it’s clear that your earnings cannot compensate for the level of strain you have to endure, you’re better off setting your sights on other profitable investments.
There’s no denying that property investment is a lucrative opportunity but sometimes things don’t always go according to plan. It can be very stressful to sell a property when things are not working out, but as long as you identify the early warning signs of failure you will be better equipped to turn things around and avoid further financial loss.
