By Joel Cone, Special to Auction.com
Being in control of one’s financial future entails knowing not only when and where to buy investment properties, but also when to sell those assets. It’s a very individual decision that should be based on your circumstances at the time.
In most cases, the exit strategy you follow will dictate when you sell. However, personal circumstances, changes in business strategy, and most importantly, market conditions, can and should change the game plan at a moment’s notice.
Flipping Property
For investors who come to the business with the intent to flip property, the answer to the question of when to sell is straightforward. The entire premise of that exit strategy is to buy properties at a discounted price, rehabilitate them within an established time frame, and then get them back on the market as quickly as possible so they can be sold.
So the plan is straightforward: buy, rehab, sell, take the profit and then find more properties to flip. Flippers want to sell their investment properties in a timely manner because that’s their business model and ultimate goal.
However, sometimes things don’t go as planned. The market goes sour before an investor can get a particular property back on the market, so it takes longer to sell. Or the investor decides, after purchasing the property, that the cost of rehab isn’t worth the money. In those situations, investors can cut their losses by wholesaling the property to another investor who will eventually sell it.
“In a slower market like it is right now, a prime location will still sell,” said Scott Mednick, a Realtor and flipper based in Orange County, Calif. “A bad location won’t sell and you’ll have to discount it out.”
In Portland, Maine, flipper and real estate agent Debbie Kilmartin has a handful of multi-family properties she’s continuing to hold, but her base strategy is to flip eight to 10 properties a year. Her reason for not wanting to buy and hold is clear-cut: she doesn’t want to be a landlord.
“Right now it’s all about pricing,” Kilmartin said. “If you look at the market and what’s selling, and go $5,000 less than the guy next door, it will sell.”
To Buy and Hold…Or Sell
When it comes down to it, real estate is local, making decision to sell a monetary one based on local market indicators.
For example, a $500,000 home in Orange County, Calif., may bring an investor $2,500 a month in rent, but in certain parts of the country, that same $500,000 may buy ten $50,000 homes that will rent out for a total of $7,000 a month, Mednick said.
So in those areas, where appreciation is nowhere near as volatile as in California, it makes sense to buy and hold for the long term in order to maintain a continuous cash flow.
In the Antelope Valley area of north Los Angeles County, long-time investor, author and coach Tony Alvarez has been a buy-and-hold investor for decades. To him, a true investor is someone studies the market where he invests his money, so that he can judge not only where and when to buy, but also when it’s time to sell.
Alvarez considers himself a “market timer who likes to buy low and sell high,” meaning he sells when market value peaks during a particular real estate cycle.
“Then I buy back the same or similar properties in a few years for less than half what those properties sold for at the peak of the market cycle,” he said. “I’ve made a fortune just using this one strategy.”
Other ideal times for investors to sell include when there’s no more depreciation to write off on the property, and when they want to consolidate holdings or upgrade to a larger property with more leverage—like selling 10 homes to purchase a 25-unit apartment building.
Change in Business Strategy
Another time investors sell off assets is when they change their business strategy. For example, investors looking to stabilize their income may sell off half of their leveraged assets in order to pay off the remaining debt on the rest of their rental properties. Or an investor may decide to flip properties instead of being a rental property owner.
Lin He, the Owner of Rellion, Inc., a southern California-based real estate investment company, started his career buying and holding condominiums is Santa Ana, Calif.
“With rentals, it’s when do you want to sell and when do you need to sell,” He said. “Those are two separate questions.”
Ideally, He would like to keep his rental properties forever, he admits. But in California, where there’s so much volatility in the market due to severely spiking appreciation, selling can be a necessity.
“Here in California, especially in coastal areas like Orange County, I want regular income and appreciation,” He said. “When do I want to sell? When it’s getting close to the top of the market.”
With his condos, which he about for around $100,000 apiece, He’s goal is to sell when the price goes up $300,000 on each. The local market’s most recent top was $380,000, so when it hits $300,000 again, he plans to sell some and use the profit to pay off the rentals he wants to keep.
Extenuating Circumstances
Then there are times, He said, that buy-and-hold investors may have to sell because of extenuating circumstances.
In investor might want to sell because he or she is a “reluctant landlord,” as in the case of someone who inherits a home and is forced to manage and maintain a property they don’t want to own.
There are also the naïve investors who think they can be landlords until they find out the hard way that it’s not so easy dealing with tenants and managing a property. For them, selling may be the only way out of a bad situation.
Some investors find that owning a property and paying the holding costs, the rehab costs, and other expenses isn’t financially viable. More seasoned investors may determine that the timing is right to do a 1031 tax-deferred exchange into another type of investment property in order to upgrade their investment opportunities.
When It’s Personal
Not every investor works the business as a full-time job. As in any business, life tends to get in the way, and circumstances may require investors to sell off assets they were hoping to keep for the long term.
These situations include a divorce, a costly medical crisis or the loss of one’s primary source of income. It may not be the best time to sell—but it’s the right time to sell.
Or, the investor decides it’s time for a career change and wants out of the business altogether.
So whether it’s personal, strictly business, or financially advisable, the decision to sell investment property is a very individual one. You’ll need to base it on your circumstances at that moment in time, given existing market conditions.
Joel Cone is a freelance writer based in south Orange County, California. For nearly a quarter century Joel’s career has focused on the residential and commercial real estate industries. After a decade as a staff writer for the Daily Journal Corp. group of newspapers, Joel was a regular contributor to California Real Estate magazine for the California Association of Realtors; was the original Orange County reporter for GlobeSt.com; wrote executive profiles for OC Metro magazine; and has been published in a number of real estate-related publications.
