When should you cut your property losses and sell?

It’s hard to deny that 2016 has been a bad year for property investors. Q1 2016 seems to have set the trend of landlords cutting losses, with one in three high end condos being sold for a loss. In particular, the heart-stopping sale of a Ritz-Carlton Residences unit at the time smashed records; it went for a $4.3 million loss. Likewise, the sale of a unit in Turquoise (Sentosa Cove) this year was at a loss of $2.6 million. But even with mass market properties, some landlords have discovered their “asset” is now a liability. So when should you cut your losses and sell?

When should you cut your property losses?

More so than any other asset, property encourages sunk-cost fallacies. This is the belief that, as you have already invested so much in something, you should not cut your losses. For example, many landlords will adamantly refuse to sell at a loss, thinking that they must at least wait to break even. This leads to an even greater loss, as the money sunk in a bad property could be placed somewhere more profitable.

Here are some situations in which it’s time to seriously consider selling:

• Your income situation has changed, and you can’t refinance
• The supply situation around your property is changing
• Your tenant demographic undergoes a major change
• The management council is incompetent
• You set rules, and they get broken

• Your income situation has changed, and you can’t refinance

Note that as rules of thumb, your property should not (1) cost significantly more than five times your annual household income, and (2) should not incur monthly mortgage repayments that, with outstanding obligations, exceed 50 percent of your monthly income*.

If your income situation changes, and you’re earning a lot less, you may find your property is now taking up a dangerous portion of your cash. You may be unable to save or invest properly, after covering the cost of your property.

The immediate solution should be to look for a cheaper loan. However, refinancing typically has one-off costs of between $1,500 and $3,000. Also, you will have to go through the loan approval process again. Given your lower income, you may not qualify for such a new loan.

Your next alternative is to raise your income. Hopefully your tenant’s lease is about to expire, and you have a chance to renegotiate. But you cannot count on always being able to raise rental rates.

In the event that neither solution works, you should seriously give thought to cutting loose your property. It is dangerous to live month to month with little in the way of savings for emergencies, or to count entirely on property for your long term retirement planning (lack of diversification).

In particular, remember that property is illiquid: if an emergency occurs and you are cash strapped, you cannot offload your house in a matter of weeks (not without incurring serious losses). This could lead to the use of credit facilities like personal loans, which means high interest rates that make your problem worse.

*We know that the TDSR framework curbs loans at 60 percent of your monthly income. However, as most financial advisors would point out, anything that drives debt obligations beyond 50 percent of your total monthly income is risky. Speak to a qualified wealth manager for a more in-depth explanation.

• The supply situation around your property is changing

The best example of this is property investments in the Iskandar region. As far back as 2015, Minister of National Development Lawrence Wong (who at the time was a Monetary Authority of Singapore board member) warned about Iskandar’s oversupply.

Iskandar was a hotspot for property investment, particularly among Singaporeans. The exchange rate between the Singapore dollar and Malaysian ringgit made Iskandar property comparatively cheap, and it’s expected that values will rise when the High Speed Rail (HSR) is completed.

However, Iskandar is slated to have more than 336,000 homes at this point, which is more than the number of private housing in the whole of Singapore. Furthermore, the land space available in Iskandar is huge (around 2,000 square kilometres).

In a situation such as this, we would – if we had invested in that area – seriously consider cutting our losses and pulling out. Some properties in Iskandar will be a little more protected (those in prime locations), but mass market properties there are likely to disappoint in resale and rental yield.

The same concept applies everywhere: if you see rental yields are falling, check and find out why. It could be due to several new condos being completed nearby, and the increased supply will mean lower rental rates; you could be in competition with many new landlords, and locked in a downward spiralling price war.

This tends to be “sell” situation, as there is little you can do change the fact. Those new developments are not likely to go away, and as your unit is older they could be much more attractive.

(The only exception to this is scarcity value; such as if you have a unit that’s much closer to the MRT station, is one of the few units with a balcony, and so forth. Such units may see less impact on rental income, but even they are not 100 percent protected against the competition).

• Your tenant demographic undergoes a major change

This is what is happening in Singapore’s luxury property market right now. As we mentioned above, many high end condos are being sold off at a loss.

Landlords who purchase luxury units are generally looking at expatriate tenants. But whilst the number of foreign workers in Singapore is still high, recent disruptions to the oil and gas and banking segments mean fewer well-heeled tenants. Even if tenants come from these industries, they may be faced with lower income, or shrinking expatriate housing allowances (their employers are cutting costs).

Pay attention to the demographic your property caters to (foreign students, factory workers, singles who want to rent a room, etc.) Your property agent can advise you on the right groups to market to, or that would be interested. If this demographic undergoes a major shift (like if there are now fewer foreign students), it might be time to look at where the money is.

The HDB rental market, for example, is rock solid despite the problems in luxury property rentals.

• The management council is incompetent

Condo management councils illustrate everything wrong with the concept of democracy. In theory, you as an owner have great influence over them. In reality, most management councils are as responsive as a particularly stubborn mule.

The sad news is that, as a condo gets older, the management council has serious impact on your property asset. There is no point having a gym if half the equipment is broken, or a swimming pool that is cordoned off for three quarters of the year. Some management councils also manage to raise maintenance costs every year, even though the only visible upgrade is the chair the security guard sleeps in.

Save yourself the frustration of trying to change the management council, and invest in a development that won’t resemble a bad nuclear accident in 10 years.

• You set rules, and they get broken

Before you invest in a property, work out the ground rules. At what point will you sell? Is it when the rental yield falls below a certain amount, or the moment it’s underperforming your stock portfolio? Establish fixed points at which you will stop hoping for a recovery, and sell.

Successful property investors don’t rely on pure instinct. They have an investment horizon (a fixed amount of time in which they will stay invested), with clearly defined exit points. It’s advisable to do this from the first moment you decide to become a landlord.

We can’t tell you what exactly the rules for you should be, as everyone’s financial situation differs (although check the guideline we suggested above, it should not cost more than 50 percent of your monthly income). But we can say for sure that, when you have a financial roadmap, it becomes easier to make decisions such as when to sell.

Work it out with a financial planner before you buy.