Most real estate investors have a particular strategy they like to follow. Some flip houses with the goal of profiting on a few flips per year. Some investors use a buy and hold strategy, hanging onto their properties for the long term. Others are wholesalers who invest in tax liens. There are a number of strategies real estate investors can choose to use.
For that reason, you may find yourself wondering which strategy is the best for you. What should you do if you find yourself considering changing strategies midstream?
A Possible Investing Scenario
Let’s imagine you have a full-time day job doing something unrelated to real estate. You occasionally flip homes on the side. You’re generally happy if you can flip one or two houses per year.
A few months ago, you bought a house at a great price with favorable financing. You’ve been slowly fixing it up, and now you’re thinking about listing it. There’s just one thing holding you back: Housing prices are climbing in most parts of the nation. You start to wonder if you should hang onto the house for a year or two.
Should you sell your property right now as you had originally planned? Or should you switch to becoming a temporary buy and hold investor for at least a year in hopes of securing a higher payout?
In other words, should you wait for prices to climb even higher before you sell? There are arguments in favor of both strategies. Let’s examine them before I offer my two cents.
The Case for Holding a Property
Prices Are Rising
In most parts of the US, housing prices have been rising over the past several years. If this trend continues, there’s a good chance a property you own today will be worth more within 6 to 12 months. Obviously, the specifics of this depend on a wide variety of factors, such as where the home is located, the price point of the home, etc. But according to Core Logic, houses nationwide saw a long term rise in value of nearly 7 percent between April 2014 and April 2015.
Earn as You Hold
There’s a good reason some people choose to become long term buy and hold investors: Cash flow is an excellent thing. Unlike many other investments, housing gives you the opportunity to earn a steady stream of cash while you hold for the sake of equity appreciation. If that’s not a win/win, I don’t know what is.
The Case for Selling Now
Stick With Your Strategy
Unless there’s a very compelling reason, it’s generally wise not to make impulse decisions about your investments. Did you go into this deal with a clear strategy? It may be better to stick with your original plan unless you can come up with a good reason why you shouldn’t. If you’re on the fence, that might be a sign you’re better off sticking to your guns.
Things Can Change Fast
Just because the housing market has historically been rising in value doesn’t mean the trend will continue. Anything can happen at any time, and the harsh truth is we can’t predict the future. I think it’s reasonable to say we’re not going to see another crash similar to the one we experienced in 2008. However, we don’t know if housing prices will be significantly higher one year from today. Furthermore, all real estate is local. The hot property market in Arizona or Maine doesn’t necessarily translate to whatever city or state your properties are in.
Interest Rate Risk
There’s a good chance the Federal Reserve is going to raise interest rates within the next 6 to 12 months. Homes may become less affordable if that happens. In theory, this means homes might be a little harder to sell, and demand may slow down. On the other hand, there’s also a chance the Fed might delay raising interest rates. Higher interest rates could also result in higher priced housing.
The Real Questions You Should Be Asking
While there’s a good chance housing prices will continue to grow at a slow, steady, and sustainable pace, you may not want to base your investment strategy on market projections. Instead, take a good look at your personal situation and preferences to find out whether you should sell now or sell later. Consider the following three questions.
Can You Cover the Holding Costs?
You’ll need to pay for property taxes, insurance, utilities, maintenance, repairs, and loan servicing. This may put a large dent in your budget, even if you’re receiving rental income on the property to cover those bills.
This is particularly true if you bought this property as a flip rather than as a rental. That means this particular property you own may or may not be a very strong rental candidate.
What Are the Specifics of the Neighborhood?
As we say, all property is local. Only you can be the best judge of what the future may hold for the particular street or area of town your property is located in.
Can You Keep Your Cash Tied Up?
Holding onto a property means you’re tying up a substantial portion of your equity and available assets. Are you okay with this?
Would you rather free up that money so you can make another investment? Or is it worth keeping your money tied up in real estate so you can take advantage of any potential market gains?
Figure Out What Works for You
Ultimately, there’s no correct or incorrect decision. You need to make a choice based on the specifics of your own situation as well as your goals. Talk to other investors, mentors, and real estate agents who you know, like, and trust. They can offer specific insights custom tailored to your situation to help you out.
What’s your take on making this decision?
Weigh in with a comment!