Real estate investing is often said to be a buy-and-hold game. If you’re not executing a fix-and-flip strategy, the conventional wisdom is to watch the asset appreciate over time while generating rental income. While this has the potential to be a perpetual cash flow, there are reasons why one would consider selling. The most obvious is you simply want to cash out, but there are other considerations related to rental income, asset depreciation, or other unrelated circumstances that can motivate the decision as well.
If you’re considering selling, it would benefit to take all information under advisement before you make your decision. The Hard Money Co. has some insights gleaned from our years of real estate experience, that might be able to help you out.
You Need Cash
There are plenty of reasons why even the most wealthy among us might need an influx of capital. Whether it be towards a practical goal like college tuition or home improvements, or something more frivolous like a new boat, cashing in on the equity you’ve built is your prerogative. But while you’re free to do what you please, know that if your property is still appreciating or generating monthly revenue, there might be other ways to get the capital you need.
You’ve Identified a Better Investment Opportunity
Even if you have a perfectly fine asset under management, there might be another property that has far superior potential. It’s a perfectly reasonable decision to elect to ‘trade up’ by selling out of Property #1 to fund Property #2. There are many instances where you simply need to allocate your equity elsewhere, which may be a profitable decision even with accompanying transaction costs.
Depending on the circumstances of your investment opportunity, hard money is always a great short-term option for acquiring the distressed asset. With either a fix-and-flip or BRRRR strategy, you might be able to capitalize on the property without needing to sell your existing asset. But we recognize that that isn’t always realistic, especially if Property #2 is already a stabilized cash-flowing asset.
If you are selling an existing investment property to fund another, consider using a 1031 exchange to defer capital gains. This will allow you to use the entirety of the equity from your initial property to apply to the second. While you will need to be diligent with some of the 1031 qualifications, this is an excellent way to build your portfolio over time.
Appreciation of the Property
One of the main objectives of real estate investment is to allow your property to appreciate, but there may reach a time where the annual appreciation is no longer outpacing other opportunities. If you feel like there are better alternatives on the market, knowing when to sell your investment property is important. Consider a situation where you have a long-held rental property. If you have a substantial amount of equity accrued, you have a large amount of capital that is tied directly to appreciation and the slow growth of rental rates. When appreciation begins to slow, the rate of return on that equity may be significantly less than if you deployed that capital in other investment vehicles or additional properties.
It’s Not Generating Monthly Income
Some investments simply aren’t as profitable as you might’ve hoped. It’s possible that you are having trouble finding quality tenants, or the market isn’t as robust as you anticipated. If you’re stuck in a negative cash flow loop, you may be considering selling your property and cutting your losses. While this may be a legitimate decision, ensure that you have sound reasoning for this decision and aren’t simply reacting to the financial pressures of the situation. You presumably had a strategy in place prior to your investment complete with a detailed analysis of how and when you would be generating revenues. Is that outline still viable? What factors have played a role in your revenue shortfalls? If your initial projects were substantially off-base, you should re-work your model and assess your current position. But maybe there were some extraneous factors (like a pandemic) that played a role. If the value of the property has been appreciating and you’re able to cover your debt obligations, consider holding on until you are able to realize a return.
You Never Intended to be a Real Estate Investor
It seems like a strange predicament to be in, but it’s more common than you may think. In some instances, landlords have inherited a property from a deceased relative. Maybe they had started renting out a vacation or secondary residence for a little extra income and it resulted in full-time tenants. Whatever the reason, we recognize that real estate investment and property management isn’t for everyone. We would recommend considering a property manager; someone who will do all the difficult work while you realize hassle-free cash flow. Its also perfectly acceptable to sell, realize your returns, and pursue other areas that better suit your interests.
No matter the reason, we trust that you’ve considered all possible angles and are doing what’s best for your circumstances. Real estate investing is an ever-changing landscape and there are opportunities to re-allocate or re-assess your position at every turn.