An Investor Analyzes: When is the Best Time to Sell Off Your Properties?
Back when I was a listing agent, I often remember people asking me, "Why is the seller selling?"
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My canned answer was that they needed the money or wanted to relocate, downsize, etc.
We could probably all list reasons why people sell. What may be more important as a real estate investor is deciding when to sell.
What Mode Are You in?
Many newer investors are in what I call accumulation mode, meaning that they’re trying to acquire as many cash flowing rental properties as possible. This is where many of us spend a good portion of our investing lives, trying to build wealth.
But as I’ve gotten older, I’ve moved more towards a preservation mode, where my strategy shifted away from acquiring properties and more towards applying my resources to assets that I want to keep in my portfolio long-term (i.e. my best, highest cash-flowing, lowest maintenance assets), as well as paying down the mortgages on them.
At times, I’ve even entered a liquidation mode, as I have other types of assets, both cash flowing and not cash flowing, and I’m often looking to simplify my life. Let’s face it, the more we accumulate, the more work and responsibility we sometimes have.
Real Estate Investing Strategies
When we first start out investing in real estate, certain factors, such as our location, our amount of capital, and our skill sets or areas of expertise, may dictate what and where we buy. Some investors I know started out flipping houses while using profits to invest in some buy and hold properties.
Over the years, my strategy was based off of what I was good at, since I had been a painting contractor and a real estate agent. I liked one to four family residential and modestly priced homes that were often in need of repairs or updating, and I liked areas on the fringe of going down in value that still cash flowed pretty well. These were blue-collar areas, where I'd fix and flip or fix and refinance before they declined.
I would cash flow better than most people that bought retail, but I had a better clientele for tenants than in the lower income wars zones. Some of these areas have continued to appreciate over time, but I’ll never see the type of double digit appreciation my friends in California might see.
I don’t usually see large swings in market value, whether up or down. Now, if I had bought in nicer areas, I might see more appreciation (notice that I said “might”), but I would most likely not cash flow at all, and I would be very lucky to just break even. This is probably why you’ll see investors start to invest outside their areas.
Another strategy for buy and hold properties may be to pay them down or off altogether so as to ensure cash flow and repair money for later years. Some folks refinance into more properties on a continuous basis. Or maybe they utilize a similar strategy to mine and keep re-leveraging their real estate, putting the borrowed capital into hard money deals and notes.
Why Investors Think of Selling
There’s a whole list of reasons why investors contemplate selling, and many times it’s due to the area going downhill or an increase in required maintenance. Or maybe the population is decreasing in the area, jobs are few, or tenant quality is down. Maybe the schools are getting worse, and crime is increasing.
Maybe the investor has little write-offs remaining as far as depreciation or mortgage interest goes.
In my situation, I realized that I don’t want to leave my heirs a bunch of properties and the headaches that go along with managing them. I may not mind dealing with all of that, but I know they would.
If you’re like me, maybe you’ve come to realize that it’s time to simplify your life and liquidate some properties.
For example, my one friend is selling off some less desirable properties that were paid off and using the proceeds to pay off some of his better properties. He also mentioned that he might sell a property in order to pay off another property that has a mortgage. Even after doing so, his cash flow will stay relatively the same, except there will be one less asset to maintain.
Some of this has to do with market timing. During the last up real estate market in my area, I liquidated about a third of my properties and shifted more into note investing. Now I’m thinking of selling a few more in the next uptick and then paying my remaining gems off as I get closer to retirement age.
Sometimes market timing isn’t in your favor, though, and you still need to liquidate. Well, now it’s time for more creativity, such as selling on lease options, land contracts, or even holding some paper.
So, how do you plan to liquidate some of your real estate, if any, when the time comes?
Leave your comments below!