While we are cleaning up our financial affairs, one can’t ignore the property burden that some of us take on. Until recently, everyone had some advice on buying property.
You must live in a self-owned house. If that was already the case, then you must own a second property.
What one did not get into were the details. Things like affordability, location, need, investment return, time horizon, risk were all ignored. As the property market has slumped in major metro and tier 2 cities in the country, many who are stuck with these ‘second’ properties are now finding it hard to sell and monetise the investment.
This causes an additional burden in the current environment where the pandemic has forced many of us to rework cash flows and try to monetise investments for greater efficiency.
What can you do? The sale of a property may be more reliant on external factors, but be wise about your options.
Don’t wait for a better price
If you are thinking of selling a residential property and waiting for a better price, keep in mind that it could take years. Property price is driven both by the broad market sentiment and local demand-supply dynamics. This dual factor can lead you to ignore negative sentiment in hope for a better price in the local market. However, owning a property has recurring costs and unless your income against that is regular you should not wait endlessly for a better price.
Given that the real estate market in major cities has seen a huge fall in demand, there is likely to be some excess supply in every micro-market. Moreover, thanks to the pandemic, incomes are not increasing at the same pace. Combine that with the cost of the loan for buying a flat and you will find that demand can take a while to perk up. The excess supply of ready to move in apartments is causing rentals to stagnate or fall which can also add to a delay in buying demand.
If it is a property you don’t need, aren’t emotionally attached too and is one where the recurring cost is higher than the regular income, then cash out even if it is at a lower and expected price.
In the current real estate market cycle, you will have to work overtime to find a buyer who is willing to pay the price you are asking for. Remember, unlike financial securities or capital market, buying and selling in the real estate market is a manual exercise without the comfort of automated exchange-based order matching.
If it is a property you don’t need, aren’t emotionally attached too and is one where the recurring cost is higher than the regular income, then cash out even if it is at a lower and expected price. Reinvest the money in a more flexible, transparent and liquid financial security for long term growth.
Calculate the cost accurately
If you’re thinking that the interest on your loan for the property is the only cost then re do the calculation. Owning a property comes with recurring costs like municipal taxes, maintenance and utility bills and repair work; these will be there whether you live on the premises or not.
If you have rental income to cover these then that’s great, if not, then you need to pay extra attention to sell and cash out. If you took a loan to buy that second property, then check up on principal outstanding and the time left on the loan. If you are towards the end of the loan period, pay it off rather than add to the interest cost. You could free up liquidity that’s tied up in loan repayment, with a high-interest cost attached.
For many, owning the house they live in, is an insurance of sorts. However, in the wave of the residential real estate boom, many of us bought into smaller properties as an investment. It is now time to clean up that portfolio and rid of yourselves of what didn’t work out in your favour.