Is there a perfect time to sell?

Question

That is the question, folks. Following Joshua Dorkin's suggestion to open a new thread, the question derived from the conversation about cash flow vs. appreciation. Rich Weese claimed that the time now is to BUY! BUY! BUY!
I claimed that this is obvious and half jokingly asked if he could tell me when to sell. Rich's response was:
"Eddie- Easy, I'll give you the answer on when to sell right now. Please write this down....(drum roll please). NEVER!!!!!!!"

So here is the question, Is there any time to sell and if there is, how would you know when?

Michael Rossi · Answer

I think there are many different answers to this question, depending on which business you're in. If you're in the flipping business, then you obviously want to sell ASAP. If you're in the rental property business, then "almost never" is when you should sell. The reason I say "almost" is that I wouldn't sell unless there is a fundamental shift in the business that causes it to be undesireable. An example of such a fundamental change would be the government no longer allowing a the tax deduction on interest or no longer allowing depreciation. Another example of a fundamental change would be a wealth tax where the government taxes our equity. Other changes could be a ban or long moratorium on evictions or nationwide rent control. Those types of fundamental changes could make it impossible to generate a positive cash flow in the rental business and would necessitate selling. When to sell becomes a much more difficult task if you're speculating on appreciation, especially if you buy a property with negative cash flow. We've had posts on this forum where people were promoting holding a property for two years or 5 years. However, if a person bought a property two years ago with a philosophy of holding for two years, we all know how well that's working!!! I've asked the question 'when to sell' of the "appreciation" crowd several times. Do they sell when a certain level of appreciation has been achieved? Do they sell when a certain length of time has passed? Do they sell when there's a solar eclipse? Do they sell when the market is at a peak, and if so, how do they know when that occurs? To date, I haven't heard a good answer. Mike

Chris L. · Answer

I always say that at the right price, everything that I own is for sale except my integrity and my kids. (On certain days the kids might be had for the right price. LOL) Seriously though, I think that an exit strategy is always important. I think a good rule of thumb is to sell when you have a better place to put your money. For instance, if and when housing prices go back up, you are able to sell a rental but your replacement cost is the same, there is no reason to sell. If you can purchase, rehab, find a renter, and then find a buyer, you might be able to make a profit and buy another one. You then have to determine what your time is worth in making that transaction and be sure to include your holding costs during the rehab and tenant finding phase. This would include: taxes, insurance, utilities, rent that you won't receive during that time of rehabbing and finding a renter for the new unit. After learning this lesson the hard way in the stock market, I like to always have an exit strategy in mind when I purchase. Just my thoughts on a Saturday afternoon.

Kenneth LaVoie · Answer

I found this thread looking for just this answer. I've been approached by Mynt investments wanting to have a chance to put any of my 5 and over apt. buildings under a 2 year lease-purchase (the version that commits them to buy, not jsut gives them option) and so I don't think I like it, because I've got my buidlings running quite nicely, and what if it doesn't work out and 2 years later they don't pull the trigger and leave me with 50% vacancies, etc. But that aside, it led me to the question ... if I'm making X amount of money per year, at what sales price wuold it behoove me to sell? I have a 2 unit I got for 30k ARC that's cash flowing approx 5-6k per year .... it would take a hell of a price to give up a 20% COC return. And I suppose if things turn sour (government, etc.) then I probably wouldn't get a good price anyway.... And even if I didn't have a better place to put money, if I had 10 million in equity, that was enough, and I didn't want to be bothered with anything, that would be a reasonable time sell, regardless of my investment options But ... My question would be "What HIGHER price would push me to sell if I wasn't planning on selling in the first place..." -- I think that "discounted cash flow" model comes into play here, but I'm not sure how to use that .... If I'm getting 15% COC on my 100K 5 unit, .... how much of an offer price in the "here and now" would be reasonable.

Eddie Ziv · Answer

Actually, 05-06 would have been even better... If we only knew... :crying:

Sean Williamson · Answer

sure 06-07 :lol:

Brian P. · Answer

That is a simple question and I actually believe it has a simple answer. Anytime I can improve my position, time proven and has led many investors who asked me that question into the light.

Kevin Yeats · Answer

Eddie Ziv wrote: Regarding San Fran rent control, if you try to sell extreme rent control properties, you'd find yourself in a really bad situation. After all, who wants to buy a property that rents the same as if it was in 1979? Eddie, I believe that the property owner has to be forward looking (true with any business). If I owned a property and the local government instituted rent controls, the value of the property would decline. I would sell and take my lumps just to avoid dealing with the hassle (or convert the property some how). I would maintain ownership if the political winds steered toward a repeal of the rent controls or otherwise indicated a more favorable climate for the business. Thanks for your input.

Mark N.A · Answer

I look at the local picture: how is the latest city government treating landlords? How about the local neighborhood associations? What are the demographics? How about long-term growth and employment? Are my tenants getting better or worse? And so on. Last but not least, am I getting burned out? The day this business isn't rewarding overall (and everyone knows there are some days and weeks when it ain't) is the time that definitely I'll sell.

Michael Rossi · Answer

I would keep holding the property, raise the rents to market, and keep collecting the cash flow. BTW, when that remaining 20% of the loan is paid off, the cash flow will greatly increase! Of course, as an alternative, once the property is paid off, you could refi and use the cash to buy another property. Mike

Eddie Ziv · Answer

Mike, All the points you made are valid points but they are valid not only to RE business. If you have a trucking company and the fuel tax double the price of a gallon which may render your business worthless, you are in the same predicament. However, what if you hold your property for 12 years, your equity in it is 80% of the value and it tripled its value over those years. The rent went up at the rate of inflation but did change that much. You don't want to jack up the rent (which you should) since you don't want to loose good tenants. Would you refinance, take cash out and buy more? Or liquidate to buy in a different area where you can get more bang for you buck?