As investors, we’re often swayed by our selective information and attention, which are incomplete. When investment properties are appreciating, we tend to believe those property are charmed and must be kept at all costs, even when the rental returns are miniscule compared to the price. And, when prices drop, we hold on since our rents are increasing on an absolute basis and relative to the price. But, while we can probably improve our investment returns by selling when the prices get outrageously high, the inherent high transaction costs of real estate discourages frequent sales. Then, the best strategy is to hold on to good performing properties over the long-term. Of course, figuring out whether you can hold on to a property and if the property is good takes some real analytical effort.
Hence, I always advise property investors to either spend a small bit of time and money to hire an investment advisor or work with a broker with an investment background. The additional cost is really minimal when considering the sums involved. For a few hundred dollars or even at no cost with a investment properties broker, you get powerful advice which can make or save you hundreds of thousands.
For example, my neighbor is a property investor. He gets a good rental rate on the property and tried to sell during the last legs of the housing boom in 2008. At the time,
the market was falling apart and he couldn’t get a buyer. So, listening to his real estate agent, who professed to be financially savvy but had no investment advisory license, he was told that he should relist in the following year when the price should have sharply rebounded. Unfortunately, rather than base his decision on solid analysis, he followed his agent’s blind optimism.
Today, with prices down over $130K, he finally has the clarity to stop working with that real estate agent. However, instead of working out his projected returns going forward, which would be quite good given the increasing rents and today’s low prices, he opted to just cut his losses and sell through a different agent. I get the sense that he was just fed up with poor advice and really got nervous that his principal was evaporating.
Aside from his current loss and lost future earnings, I’m rather concerned that this person’s experience probably left a bad taste in his mouth about all real estate professionals.