City Living: Should second-time buyers hold onto their first home as an investment, asks Edel Morgan.

Trading up but unsure what to do with your existing property? Should you sell it or hang on to it as an investment property?

That may depend on a number of factors. First off, are you prepared for the hassles of being a landlord? Unless you pay an agent or coerce a family member into looking after the property, you will be a hands-on investor and will shoulder the burden of finding tenants, responding promptly to maintenance and repair call-outs, dealing with potentially difficult or demanding tenants and tiresome paper work, ie, keeping receipts and filing tax returns.

If you are prepared for all of this, then the next question is, can you afford it? If you are trading up and are over-borrowed, the danger of keeping the property is that you may have difficulty letting it.

"Assuming some equity and a good location, it makes a lot of sense to hold on to it," says Ian Mitchell, managing director of Deloitte Pensions and Investments Limited, "but you have to bear in mind if it's not a principal residence there's a tax cost if you sell it."

If your property is in an area where prices are stagnant, it doesn't necessarily mean you should get rid of it.

"Even if prices aren't going up, if you can cover the costs it is still a a good thing to have. But if you are not going to be able to get it rented, and the value isn't rising then you have to work out the cost of asset. If there is a glut of property in the area and you can't rent it then the cost of the asset is high."

An alternative might be to sell up and buy a property in a better rental location.

"But if you do this you will incur legal and stamp duty costs so you are triggering risks," says Mitchell.

Whether or not building a portfolio of property is wise in the current climate can depend on circumstances, he believes.

"If you are talking about a long-term investor who sees life in tranches of 10 years, then I'd be all for investing in property. As long as you can continue to cover the worst case scenario with a good emergency fund."

Whether or not a serial investor can afford to pay an agent to look after their properties will depend on whether they are overstretched. "An agent will take a percentage of the yield which an investor may not be able to afford if they are mortgaged to the hilt."

He believes that property is still a good investment vehicle, but only for those prepared to take the long-term view. "A broader question is whether it is sensible to cut and run and invest in equities again. All things being equal, with property you are investing a substantive part of someone else's money, which makes a compelling story, particularly if there is strong yield and potentially capital growth.

"The downside to a long-term property investment is that you have to factor in costs, which can be expensive. If you are holding onto the property for up to 20 to 25 years, then it's a good long-term investment." The future of the rental market remains uncertain - although some believe that the cash surge from the Government SSIA scheme payout will have a knock-on effect on the property market.

Properties in areas with a good transport infrastructure close to centres of employment and good local amenities tend to fare better during dry rental periods. In the current market finding a tenant quickly may require upgrading the property, being flexible with the rent and acceding to your tenants' demands - at least the reasonable ones.

You should also be conservative in your capital growth expectations. Assume that for a property held for the next 20 years you will obtain an average annual capital growth factor of 2 per cent to 3 per cent per annum and allow for 15 per cent non-occupancy over the time that you own the property. If this would put your budget under severe strain then you can't afford it .

Experts say it is better to own two properties that are profitable than to buy four through excessive gearing. It's difficult to go liquid in a hurry if your investments are in property and so there should be adequate cash reserves to meet all of life's contingencies.

Some analysts predict that even assuming two per cent capital growth per annum for 20 years, and a 20 per cent vacancy rate, and interest rates doubling before the next possible rent rise, the prudent investor can do well for themselves over the long-term.

The flip side is the number of people holding on to their first and even second properties when they trade up has created a dearth of second-hand homes coming on the market in some areas, pushing prices upwards and providing less opportunity for buyers.