When Should I Sell My Investment Property?
Welcome to the 120th episode of the Alternative Investing Podcast!
In this episode, I will discuss the five most important things you must consider before selling your investment property.
• Five Things to Consider Before Selling Your Property
• Factor #1: Likely Prospects
• Factor #2: Past Prospects
• Factor #3: Evaluation of Other Opportunities
• Factor #4: Time Horizon
• Factor #5: There’s No Right or Wrong
• Final Thoughts
If you’re an investor who wants to make wise decisions by knowing what to consider before you sell a piece of real estate, then make sure to listen to this episode!
04:45 Five Things to Consider Before Selling Your Property
06:00 Factor #1: Likely Prospects
08:37 Factor #2: Past Prospects
10:22 Factor #3: Evaluation of Other Opportunities
12:20 Factor #4: Time Horizon
14:43 Factor #5: There’s No Right or Wrong
16:36 Final Thoughts
In this episode, I want to address an email I received a couple of weeks ago, answering the question, “When should I sell my investment property?”
The answer provided by this wealth expert was unhelpful and a little bit superficial, so I want to unpack today what he said and why I disagree.
For this exercise, I’m going to assume that if you sell a piece of real estate, you want to take the working capital out of one asset and put it into another investment.
By doing it, you’re prepared to let go of potential future profits on the asset that you already have and move it to another deal where you could potentially get better opportunities.
If you’re an investor and you’ve earmarked capital for investing, I’m also going to assume that you’re not selling an investment property because you want to buy a boat or a bigger house.
Another thing I want to mention is that in my 20-plus years of investing, one of the pieces of advice I repeatedly heard was that you should buy investment properties and never sell them.
The reason was that you could capture as much growth as possible for future passive income and wouldn’t incur taxes.Read More
When I first started investing, I tried to apply that logic.
But I realised that when you buy a piece of real estate, you’re speculating that it will go up in value and deliver you the outcomes you want, whether passive income or capital growth.
To some degree, you’re going to get it right, but sometimes, you’re also going to get it wrong.
You can do many things to stack the odds in your favour so that you end up with the highest probability of achieving whatever your goals are.
But let’s say your aspirations or life circumstances change.
Now you’re left in a position where the investment property you’re holding isn’t giving you what you want.
The question then becomes, “Should you cash out of one investment property and lump taxes and entry-exit costs so you can put it into another investment?”
It’s difficult to answer this question superficially, like in the email I received, which said it depends.
The person that sent this email is trying to sell real estate and has a vested interest in selling you the story that you should hold your properties regardless of whether they perform.
The email tries to convey that if you sell real estate, you’ll lose your infinite income stream and have to pay taxes. That in itself is debatable.
Many investors are holding real estate out there that doesn’t develop and doesn’t give them cash flow.
In some cases, they thought it would’ve given them cash flow by now. In other cases, they knew that there was a growth play.
But either way, the answer doesn’t help people understand whether they should sell investment properties or not.
Five Things to Consider Before Selling Your Property
That’s why I want to pull apart five things you can think about if you’re considering selling your properties.
These five things are also helpful if you want to put your assets under the microscope to evaluate if they should be kept or sold.
As a proviso, I’m not the kind of investor who likes to trade real estate.
I don’t like buying real estate for a short period and then flipping it to make a small profit. This is a very active strategy.
I know there are lots of people who’ve made a lot of money doing it. But what I’m talking about here is if you’re an investor who wants to be more passive.
You’re acquiring real estate for the medium to long term and evaluating whether it’s performing, holding equity, or delivering cash flow.
That’s where we’re going to focus today rather than on the active trading side of real estate.
Factor #1: Likely Prospects
The first consideration that you need to focus on is likely prospects.
Nobody has a crystal ball, and I recognise that people think there’s an element of speculation when I say likely prospects.
But what I’m saying is that this is a research-based task where you would ask yourself these questions:
What kind of infrastructure spending is going on in that particular community?
What kind of housing is most popular?
What is the likely population growth?
What is happening, that makes this an attractive or unattractive place to live?
As you can see, it’s not going to be something superficial as this requires you to trawl for research.
Local government and council websites can often be useful for providing insights and information about what’s happening and what’s in the pipeline.
This is all about understanding the likely prospects for a particular market.
On top of that, you also want to identify what types of real estate are performing well in a particular suburb.
For example, if you hold an apartment or a unit in a market where people are demanding houses, you might find that there could be challenges with the rate of growth that you achieve because it’s not what people want.
Likely prospects is a holistic research exercise determining how a specific piece of real estate will appreciate.
Another part is knowing how likely it is to be a good performer if you’re looking at cash flow.
One of the things that upset me is real estate professionals who would show you a profit and loss statement for a piece of real estate.
Then they would make unrealistic expectations around how revenues or rentals from that piece of real estate would increase every year.
Based on my experience, you’re not going to have year-on-year growth with your rental because it’s a little irregular. It goes up in lumps and bumps.
I noticed that the profit and loss a property professional sometimes gives me is very optimistic.
I want you to make sure that you do your homework and speak to buyer’s agents, property managers, and other professionals in the market to see if they can corroborate what’s in your research.
Factor #2: Past Prospects
The second thing you need to look at if you’re considering whether you should sell a piece of property is past prospects.
It’s easy to focus on the growth and appreciation you may have and say that past prospects have been tremendous in a heated market like we’ve had the last couple of years.
I know many people are patting themselves on the back, talking about what amazing investors they are because they’ve made a lot of profits in the last two years.
But when looking at past prospects, it’s very important to look at an annual average result over a longer period of time.
As a rule of thumb, I look at what has happened with a particular asset over ten years. This gives you a better insight into whether this property will continue to perform or not.
Obviously, this has to be taken in context with likely prospects.
For example, something is being built, or some investment is coming to an area. That’s not to say that you can’t see better growth in the future.
There are plenty of data houses out there that publish information that can help you look at past performance.
I like looking at the annual average yield income stream because it gives me a sense of whether the area I’m investing in has performed consistently well and is likely to continue.
Factor #3: Evaluation of Other Opportunities
The third consideration is evaluation of other opportunities.
Again, I’m assuming you’re taking capital out of one asset and diverting it to another investment to evaluate other opportunities and not spending it on lifestyle expenses.
If you’re going through the trouble of selling a piece of real estate and paying taxes and exit costs to deploy whatever is left into a new investment, you need to understand how all of those measure up.
The evaluation of other opportunities and the measurement of opportunity costs is really important.
Many people give lip service to that idea but don’t actually take the time to calculate and measure it.
When it comes to evaluating opportunities, what most of them do is speculate that one deal will outperform another deal.
Unfortunately, many people are fishing from a small pond of opportunities when choosing real estate deals rather than thinking outside the square and incorporating other strategies and markets.
The best example is alternative real estate deals, where I’m contrasting keeping an investment property, which is a great growth play, with alternative investments.
On the flip side, I’m contrasting that with something that will give me cash flow. See? It’s not comparing apples with apples in the first place.
What this allows me to do is determine what kinds of strategies I should be focusing on, given my current wealth status.
Factor #4: Time Horizon
This leads me to my fourth point, which is the time horizon.
When do you want to reach financial freedom? When do you want to achieve your financial goals?
If your time horizon for reaching certain levels of financial freedom is short, you need to consider if your investment property can give you what you need in the timeframe you have in mind.
If it doesn’t, and you can see that you need to shift gears and move some of that capital into other opportunities, that can come about in two ways.
It could come out by you refinancing the asset and going to the bank saying, “I’ve got all this equity. Can I have some of it back so I can go and do other things?”
This is the ideal outcome because you can continue to get the benefit of future growth in the assets that you have.
But sometimes, the bank won’t give you a refinance or equity, and that’s the point where you might think, “If I don’t sell, I might continue to get growth, but I’m not going to get cash flow. So, in this case, I’m still a great distance from the financial freedom or the financial goals that I have.”
This is when it becomes a question: “Do I sell in order to harvest some of that capital and redeploy it into better opportunities?”
If your time horizon to stop earning active income is relatively short, then deciding whether you should sell or keep it is important.
However, if you’re young and you’ve got a long time horizon, that decision to sell or keep can be postponed, especially if you want to remain as passive as possible and the overall performance of each investment is good.
Again, we’re not aiming to get killer results yearly with our investments.
We aim to get reasonably good returns that you can live with over the medium to long-term horizon.
Factor #5: There’s No Right or Wrong
The final thing I want to say about when you should sell your investment property is that there’s no right or wrong.
Even if you intend to hold for the long-term, I would still encourage you to sit down at least once a year and evaluate your real estate property by asking yourself the following questions:
How did my property perform over the last year?
Is it moving me in the direction that I want?
Is it moving the needle on my wealth?
Am I happy to keep this investment in my portfolio?
Buying real estate is expensive. Everyone has a finite amount of borrowing power, and few people purchase traditional property with cash.
Given that everyone has a finite level of borrowing that they can carry, we want to use that leverage wisely.
If you hold a couple of dud investment properties, then there’s a pretty good chance that you will not get results over the long term.
The difference between what two investors are doing might seem minuscule, but because of compound interest, those differences will become massive over 10 to 20 years.
I’m not saying you should compare your journey to anyone else’s because we always want to run our own race.
Prospects, past performance, opportunity cost, and time horizon all matter greatly when you’re evaluating each piece of real estate at present.
There are a lot of superficial opinions out there trying to motivate you to acquire more property.
I know this because I’m talking to people all the time, sharing horror stories of how they were pushed into buying real estate when they didn’t want to or didn’t think it was a good idea.
Stay in full control of your decision-making and don’t bend to pressure tactics.
That’s not to say you can’t get some support, though.
There are still a lot of good people out there who are doing great work in terms of researching and helping you make better investment decisions.
If you’ve got topics or questions that you want to be answered on this podcast, please continue to email me at firstname.lastname@example.org.
If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.
If you’re interested in understanding how to create wealth through alternative strategies, please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.
Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!
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