In Part 1, we unpacked why some new build townhouses have dropped as much as 40% in value. But if you already own one of these properties, knowing what went wrong only gets you so far - the real question is what do you do now?
Should You Hold or Sell Your New Build Townhouse?
For some investors, falling property values are only part of the problem. They may also be topping up their investment by tens of thousands of dollars each year, putting real cash into an asset while waiting for potential capital gains that haven’t arrived.
That can make selling your new build townhouse tempting, but the decision isn’t always as straightforward as looking at how far its value has fallen.
One approach James has been using with clients is to put both scenarios into a spreadsheet. This means looking at the rent coming in, all the costs associated with owning the property and the annual cashflow top-up required to hold it.
That can then be compared with what happens if the property is sold. If the sale leaves debt behind, how much will that debt cost to service?
In the client scenarios James has looked at, selling has actually left the investor in a worse cashflow position than continuing to hold the property. That doesn’t mean holding will always be the right decision, but it shows why the numbers need to be worked through before crystallising a loss.
Why New Build Townhouses Have Been Struggling
The performance of new build townhouses can’t necessarily be separated from what’s happening across the wider economy and property market.
Mike’s view is that the challenge isn’t simply an oversupply of housing. High living costs have changed the way households are being formed. People may be staying at home with their parents for longer or delaying other major life decisions because they don’t have the spare money to make them.
Adam sees another issue within the new-build market itself: an oversupply of lower-quality stock. When developers need to move stagnant properties, they may cut prices to sell them. Buyers then compare those properties with similar-looking townhouses, putting pressure on better-quality stock to compete on price too.
That creates an important distinction. A property falling in value during a difficult market doesn’t automatically tell you whether the underlying asset itself is good or bad.
The Real Cost of Selling
Selling isn’t simply a matter of comparing what you paid with what the property is worth today.
There can be real estate agent fees, additional holding costs while the property is vacant and the risk that the eventual sale price is lower than initially expected. If the property was highly leveraged against another home, selling could also leave a significant amount of debt behind without the rental income that previously helped support it.
This is why the decision needs to start with the investor’s actual financial position rather than the emotional desire to get rid of an underperforming investment.
Property is also generally being approached in this discussion as a long-term asset. Mike points out that judging an asset intended to be held for 10, 15 or 20 years solely on its performance over four or five years can create a mismatch between the investment timeframe and the returns being expected.
Could Selling and Reinvesting Make Sense?
There are situations where an investor may decide that holding is no longer the best option.
If they can sell and move into an asset they believe has stronger long-term growth or yield prospects, the opportunity cost of continuing to hold the existing property becomes part of the equation.
But there is an important step before selling: making sure the next move is actually achievable.
Mike recommends confirming what the existing property could realistically sell for and speaking with a mortgage broker about borrowing capacity and pre-approval before committing to a sale. The last thing an investor wants is to sell their existing property only to discover the bank won’t finance the replacement they intended to buy.
Loss aversion can also influence the decision. Investors can become reluctant to sell an asset while it’s in the red because they want to wait until it recovers. But the more useful question may be whether the existing asset is likely to perform as well as the alternative available to them.
Could Buying Another Property Improve Your Position?
For an investor with sufficient cashflow and borrowing capacity, another option discussed was buying again while prices are lower.
James compares this with averaging an entry point when investing in shares. If someone bought a property at the top of the market and its value subsequently dropped, purchasing another property at a lower point in the market could improve the overall entry point across their portfolio.
The idea isn’t simply to buy another property because the first one fell in value. The investor still needs the financial capacity to do it, and the next property needs to stack up as an investment in its own right.
When Does the Cashflow Become Too Much?
There can eventually be a point where the ongoing cost of holding an investment becomes difficult to justify.
One example discussed was an investor topping up a $700,000 property by $40,000 each year. At that level, the property would need to grow by more than 5% just to offset the annual top-up before inflation is considered.
James suggested that annual top-ups exceeding 5% of the property’s value are a significant warning sign. Importantly, that isn’t an automatic signal to sell. It’s a signal that the investor should get advice and properly assess their options, because the rest of their financial position may still make holding the better choice.
For investors who can’t sell without being left with substantial personal debt, the options may be more limited. There may be lending changes worth exploring, such as interest-only repayments, but what is available will depend on the investor’s equity position and what the bank is prepared to approve.
Key Takeaways
- A large fall in value doesn’t automatically mean selling is the best financial decision.
- Compare the true cashflow cost of holding with the cost of selling and servicing any remaining debt.
- Factor in selling fees, vacancy periods and the realistic sale price before making a decision.
- Consider whether your investment timeframe matches the long-term nature of the asset.
- If you’re considering selling and reinvesting, confirm the next purchase is achievable before selling the existing property.
- Holding a weaker asset also has an opportunity cost if a stronger investment is available.
- Buying again at a lower point in the market could improve the overall entry point of a portfolio for investors with sufficient cashflow and borrowing capacity.
- If annual top-ups exceed 5% of the property’s value, it’s worth getting advice and reviewing the numbers rather than automatically deciding to sell.
Next steps:
If you’re weighing up whether to hold, sell or restructure your property investment, speak to the Lighthouse Mortgages team to understand your options and put the numbers behind the decision.
Thinking about buying a new build? Speak to the Lighthouse Property team to understand what makes a quality investment and avoid costly mistakes.
If you’d like to watch more, check out this episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
