Why Would You Ever Sell Your Real Estate?

Question

Hi BP,

Wanted to get a few opinions on this. I've some books like "The complete guide to buying and selling apartment buildings" that say you can attain wealth faster long term if you sell your properties and exchange them for larger properties. I've heard other experts like Rod Khlief say that it never makes sense to sell when you can refinance instead, keep your property, buy another one, and compound your cash flow. Which do you agree with and why?

Arturo Borges · Answer

@James Gleeson It is a valid point of view, but I always tend to go against the grain when someone says that something is "better" or "you should never", "you should always". It always depends on your strategy, risk tolerance and pretty much what you like doing. For some investors, it wouldn't make sense to hold on to a property for 20 years, they simply like to add as much value as possible and get rid of it, and be in constant acquisition mode.

Just like the stock market, you can play the game as a "trader", or as an actual investor, both ways you can make money, but then again, what is your strategy? how tolerant with risk are you? do you like being constantly trading stocks and hands-on in the process? or simply deploy your capital in a stock that you actually believe in and have a solid understanding of, and then hold it for years to come?

I hope this helped a bit!

Ivan Barratt · Answer

Sold my small assets this year to get into a cash position in anticipation of larger opportunities. One simple formula aided me: Return on Equity. My equity was such that the actual yield was low (sub 5%).

Why not refinance and hold? Simple: I'm addicted to site managed assets. In other words once you acquire apartments with on site staff you typically don't go back! ;)

Omar Khan · Answer

@James Gleeson It depends if you're buying from personal capital or if you've raised money. Apart from the plethora of good reasons mentioned by the posts above mine, syndicators tends to sell deals because that is where they make the bulk of their returns i.e. get to participate in promote.

A syndicator makes a disproportionate bulk of their gains from an investment on sale. Btw, this is a common practice across most private equity.

Eric Schultz · Answer

Deciding on whether or not to sell off real estate may simply come down to answering the question: what is the highest and best use of the equity in your property?

West Coast example:

Four years ago I purchased a property with 20% down and refinanced to even a lower interest rate two years ago (break even point on the cost to refinance was reached in the first six months). Today my equity in the property is about 50%. Strong coastal market appreciation combined with DIY remodeling projects have allowed for this to be possible in a rather short period of time. Since I have lived in this property for 2 of the last 5 years, I can sell off without paying capital gains taxes. I will lose about 7% on the sale to pay off sale commissions and closing costs, but that still leaves me with my original 20% down payment and another 20%+ gain. The tools & material costs associated with the DIY projects would account for another 3%, which were paid upfront at one point and then recovered with the sale of the property. I could then re-deploy the 43% liquidated equity into the great heartland of America and buy several financed properties with $150 / door / month cashflow. Being that I'm from the Midwest, I am already investing in the Heartland this way.

So, would doing something like this be a good move based on the "highest and best use" philosophy? Possibly...

Todd Dexheimer · Answer

Some good points already. For selling, one benefit is avoiding capital expenses. If you renovate and hold less than 10 years, most everything will still look newer. Much after that, things break down, look outdated or are not used.

Neil Henderson · Answer

It all depends on the business plan that the investor went in with.

If you purchased a large multifamily property as part of a syndication, you more than likely have investors who are going to want their capital back at some point. A straight refi might get them their original capital all back but that would take a home run value add play in my opinion. Most syndicators are looking to refi after they've executed the value add portion of their plan and return a portion of their investor's capital, but a smart syndicator (conservative) wouldn't promise their investors that would happen, it's an unexpected bonus. The cash flow from a large multifamily property, while significant, will usually pale in comparison to the gains that can be realized by selling at a new value added NOI/exit cap rate.

If you have investors who are content to give you their money and sit and collect cash flow, then a refi and hold forever strategy might work. It's just not typical in my experience.

Austin Fruechting · Answer

I don't agree or disagree with either of them. They both have merit.

As to why you would sell:

Many people sell apartments after 3-7 years because they are syndicators and have investors along that want an exit strategy.

Even if investors are not along; there are other reasons to sell things too, mainly that you've grown beyond them. If you're at the level of 50 unit buildings, you may just want to dump your 4 and 6 unit buildings.

I'm currently selling a couple SFRs because they are my last two properties that are one property/one mortgage. I have another 140+ units across 66 properties, but only 5 mortgages for all of those. At the level I'm at now, refinancing a SFR isn't going make any difference to what I do next. Heck even selling these doesn't make much of a difference. I'm just doing it to simplify a little.

Mike Dymski · Answer

Sell when the property strategy has been executed and the alternative uses for the capital are better.  Maximizing the return and minimizing the risk for our personal capital is very important.  Most investors subject potential acquisitions to strict criteria but they don't subject their existing portfolio to the same standards.  If you are not a seller, you're a buyer (of your existing properties at today's prices)...the past is irrelevant.

Will Gaston · Answer

@James Gleeson You're also compounding your payments, debt, and responsibility.

That's perfectly fine and something that I've done and will likely continue to do. But the "refi till you die" strategists often omit the downside. It's not all sunshine.

Why Would You Ever Sell Your Real Estate?

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