Contributed by Nathan Birch – Investor and co-founder of Binvested
NATHAN BIRCH IS SELLING SOME OF HIS PROPERTIES?
For a long time now, I’ve been collecting properties like kids collect action figurines in a happy meal. I never like to see one go.
But recently, the finance environment has changed…
It’s a bitter pill to swallow for a buy and hold investor – but I need to optimize to suite the times we are in by letting some go.
Just to be perfectly clear this doesn’t mean that I’ve stopped buying! Far from it, last year alone I did $10 M in new property purchases. This year I am looking at spending $6 – 7 M on new properties.
However, I see this stage in my investment journey as graduating from my ‘foundation’ portfolio into a development phase.
Personally, I am mainly interested in buying anything that I can develop into a bigger property in the future.
WHY AM I SELLING SOME OF MY PROPERTIES?
Now, I’m not selling up because my grand plan has failed, vindicating the negativity out there.
Not at all! I can sit on this portfolio and ride these finance changes out without breaking a sweat, but that doesn’t sit well with me. I always want to be taking action!
I want to keep moving in a market where almost every investor is stuck in the mud – even if that means selling to get into a new position.
For years now I have been channeling equity into deposits for new properties, but it’s no secret that equity is very hard to release these days – even if you have millions of dollars of it!
The reason behind this is serviceability restrictions. Anytime you withdraw equity, you need to show income to service that new loan. Sadly, the banks don’t value income as highly as they once did whether it be rental or otherwise.
One way to access equity today, if you can’t service for new loans, especially for anyone with a large portfolio, is plain old-fashioned selling.
The cash can be used to consolidate the gains you’ve seen in your foundation portfolio and take it to the next level, especially in the tight finance environment we are experiencing now.
WHAT AM I OFFLOADING?
So, you may be thinking ‘which of your properties are you selling?’ In my case I am selling those with the least mileage remaining.
For example, I’m looking to sell some regional properties and certain metro properties that I feel have peaked in the current cycle and I can redeploy the funds to better suit my advanced strategy of developing with cash.
I’d say about 70% of my portfolio is anchored in bread and butter properties like townhouses or units. I bought many of these for $150,000 whereas today they are worth $400,000 or more. Roughly speaking, I’d be looking to make $250,000 on these from selling.
As you can see, that’s a nice cash release once I repeat it 10 times for example – but I will make sure to keep most of my foundation portfolio intact.
ANYWAY, ENOUGH ABOUT ME. WHAT ABOUT YOU?
You know my goal, but what is your goal? How will you take things to the next level?
The next level is paying down some of your debt, consolidating your position, and making your portfolio work even harder for you, so you can exit the workforce.
Given the current finance environment, you could be locked out of deals.
So, you’ve got to consider the opportunity costs of being forced to the sidelines for a year a more in a rising market.
To stay in the game you need to devise a new game plan for this next round of your investment.
HOW THIS MIGHT PLAY OUT…
Let’s say you are someone who followed my strategy over the last 6 years and now has 15 properties, which were purchased for $200,000 each.
These properties each have $180,000 owing on them, however the property value has gone up to $400,000. This leaves the overall equity position at $3.3 M.
With large portfolios in the current market, and APRA restrictions, you may find extracting equity with all your existing loan obligations and your current income to be extremely difficult.
However, you could sell down some of your properties, clear your debt and enjoy a passive cash flow.
Alternatively, you could use that cash to buy some land, build a house on it, sell it off and make a healthy profit. Then just rinse and repeat.
Either way this can get your portfolio moving again or let you enjoy Pina Coladas in the Bahamas.
GETTING THE MOST FROM YOUR SALE
Selling properties is not something I’ve talked about much before however, it’s always been a part of my strategy to re-balance my portfolio over time. Like with buying properties, I don’t take any chances in selling them either.
With this much skin on the table, it’s important to get it right!
Keep an eye out for my next update where I will share my tips for getting the most out of selling a property.
In the meantime, contact my team if you would like us to review your current portfolio, and if you are thinking of selling, we can put you in contact the right agents.