Sim Property Newsletter Oct 2010 - Prices, Returns & Sales

This month we focus less on property markets around the world and more on the philosophies and considerations of investing in property.

How to measure if your investment is a success and know when to sell?

If you own an investment property what is the best way to measure your returns and thus decide if it's doing well or not?

A simple and clear way to do it is to look at how much money you would make if you sold the property after all your costs as a percentage of the purchase price (ie profit from sale divided by purchase price). You could also divide this number by the number of years you held the property to get your annual return.

Perhaps a slightly better yardstick is to look at the return on your investment (ROI), ie cash out divided by cash in. Again you can divide this figure by the number of years you held the property to get the ROI/yr. All things being equal a property where you put 10,000 in and get out 20,000 is better than putting in 15,000 to get out 20,000.

The above two examples do not take into account cashflow. A simple modification would be to add the total net rental income to the above returns.

You could just look at your rental yield (total rent divided by purchase price) and compare this to yields available on other investments and also to your mortgage rate.

Another useful measure is to look at your annual return on the equity you have invested in the property. For example, a property purchase at 100,000 with a 10,000 deposit (90,000 mortgage), that gives net cash of 100/mth would be a 12% return on the initial money you invested (ie 100*12/10,000), which is a useful comparison to savings accounts at the local bank. However, if this property was now worth 200,000 and you could pullout of 110,000 (assuming no costs) this would give you a return on equity of just 1.1%, which is quite a big difference, in which case you might be better off cashing out and reinvesting elsewhere particularly if the prospects for property price growth a marginal.

Naturally it's possible to complicate the analysis much further by estimating what future returns would be worth in today's money and so on. However, the general principal is to always assess if you have your money working hard for you and if not how can you improve it.

If you can get a very high ROI in a short period of time then I'm often tempted to sell. Also, if I have a large amount of equity in a property that is not very high yielding and is unlikely to grow much I would again be tempted to sell. If you have a high yielding property with good equity locked in I would be tempted to refinance, pullout out some equity tax free and reinvest it. Generally I don?t like to sell (particularly in slow markets such as nowadays), though if I think my money can be better used elsewhere it's better to move on in search of higher returns.

As with any investment there are a number of factors at work and considerations to make. Get in touch if I can be of any help with your property investment decisions.


What if prices don't increase?

Probably the biggest issue facing property investors in Central & Eastern Europe is negative cashflow. The combination of a weak rental market and repayment mortgages can be a killer. In the days of rapidly rising prices such negative cashflow was perhaps a little easier to stomach, however, after the last 2 years of falling prices this situation is bleeding some investors dry, especially those who have multiple units.

The question you have to ask yourself is what if prices for rentals and sales don't rise for at least another, say, 3 years? Could you handle another 3 years of negative cashflow, and even if you could is it worth it?

The answer, as always, is a complicated one, but you have to limit your downside risks.

If your property has just marginally negative cashflow and you take the view that prices will rise well, in comparison to other markets, over the next period then it's probably a good idea to hold. If you have bought a number of years ago, still have negative cashflow and can get out with a healthy profit due a sale then this may be a tempting option. If you've got both strongly negative equity and a property worth less than you paid for it (or even negative equity) then you?ve got some pretty tough decisions to make.

It all comes down to your view on the future prospects of your property, how your present cashflow is, and would you money be better off invested elsewhere.

Personally, although I don?t think property prices will change much (either up or down) in 2011 in CEE, though that said I'm generally quite happy to both buy and sell in the region (and hold CEE currencies) should the right opportunity (price) come a long.


More winners than losers

Warren Buffett is widely quoted for his investment pearls of wisdom. In a recent interview he discussed the large number of mistakes he'd made over the last year and said he is likely to continue to make mistakes as its almost impossible to avoid when investing. He stated he was quite comfortable with his mistakes on average because when investing you have to make sure that the number and size of the profitable investments you make far exceed the number of losing investments you make, and this is what counts in the end.

One year ago I bought a property that at the time was quite a good deal and is now rented out on a healthy yield (after being renovated). However, this month I noticed an identical apartment on the market in the same street, same floor, same condition for 10% less than I paid for my apartment one year ago! This is quite galling when you think what else you could have done with your money over the last year and still be able to buy the same property for a much lower price. Unfortunately, I?m not immune to such mistakes either.

Luckily this mistake is offset by a property (worth twice as much as the above mentioned property) that I bought two years ago and am in the process of selling at a price 40% more than I paid for it, so it?s not all bad. It also goes to prove there are still go opportunities around if you know where to look despite the falling prices over recent years.

The trick is to limit your downside on the bad investments and maximize your upside on the good investments.


Quarterly reports

In the near future Sim Property Group will start to release a regular quarterly report with all the latest prices and prices trends in our main markets in Central & Eastern Europe. This intends to give investors a more consistent and regular overview of the markets in which they hold property in.

In the meantime if anyone has any specific questions about rental or sale valuations for their property then get in touch.


Regards,
Simon Tweddle.
www.simpropertygroup.com