When Property Values Go Up Significantly, When Should You Sell?

Question

I have several multiple family properties that have gone up in a value a lot (IMO). Is there a legit formula or equation people use to determine when is the best time (or makes the most sense) to sell? Thank you!

Ex 1: 20 units Knoxville; Purchased $570K; Owe $350K; Local Broker thinks $1.6M may be possible.

Ex 2; 6 Unit in Indianapolis; Purchased $310K; Owe $187K; Recent RE Agent MKT Analysis = $700K.

Joe Villeneuve · Answer

My answer is a long, long time ago. As of right now you have $1.765M in equity, wasting away, that is only worth $2.3M in Property Value. If you figure you put down 20% on a property, that means your $1.765M in equity should be worth $8.815M in Property Value. What would that give you in CF too?

Deonte Brown · Answer

@Mark Berardi - There is a lot of great advice already given. However, another thing I think about when selling a property when the market is hot as it is today, you would have to find another property in the same hot market. In essence, the key is to have another property lined up that yields a greater return. I would recommend a 1031 exchange. [Solicitation Removed by Moderators]

Michael Dumler · Answer

@Mark Berardi you should sell when you have another asset on the table that needs to be financed but will perform better then the current property, hence the reason why so many investors 1031 into a new deal. Technically, you can calculate annual appreciation based on past data and metrics, but there are also many other variables/factors to account for that would make it nearly impossible to accurately predict how your portfolio would perfrom 5, 10, 20 years down the line. Hope this makes sense.

Bjorn Ahlblad · Answer

@Mark Berardi It is tempting to sell and get all that money! Consider your goals and also your tax burden if you do sell. Another avenue is borrowing against the new value. You have likely worked to improve that 20 unit building-why give that up-so consider the alternatives carefully. All the best!

Rick Bassett · Answer

As tempting as it's been to take money off the table, we've sold just 3 properties over the past 30 years. The first one we sold taught us the cold hard truth (and painful lesson) about federal & state capital gains taxes and depreciation recapture. We learned from that expensive lesson and did 1031's on the next 2 that we sold, a much better (but complicated and somewhat riskier) way to go. Even though these 3 properties had appreciated in value, we only sold them because we hated them for various reasons. We have had the opportunity to sell dozens more of our rentals at significantly higher prices but we like them and the numbers work so we continue to hold them. Instead of selling them we periodically refinance them and take our money out that way.

Bill B. · Answer

As soon as you have an investment you “know” will perform better. As much as prices have skyrocketed they will probably never be cheaper in your lifetime. So unless you mean sell and buy another property (which we assume has also skyrocketed) you’ll either have to be willing to pay more in the future than you sold for or be done with real estate investing. As someone posted before, real estate is hitting “all time highs” 99% of the time.

Will Barnard · Answer

Additionally, often times the ideal exit point is after value adds have been completed, the AGI is stabilized and at or near it's max peak. Once you have only market appreciation upside and not forced appreciation through value adds (which can be expense decreases, additional revenue added, rents raised to market, loss to lease and rental concessions at historic lows), your rate of value increase will be limited, hence the opportunity to exit and enter another with value add opportunities.

Will Barnard · Answer

The best formula is to chart your NOI from year 1 on and forecast the upcoming next 5-10 years. When you calculate your markets cap rate and also chart the value, you will quickly see the most ideal exit year which would be after the few years in which the value increased the most. When you exit at the ideal point, you really help boost your returns. That said, one may also accomplish this with a cash out refi putting tax free capital back in your account for additional purchases. You will need to decide if these units fit your long term goals, operate well for you, and are candidates for extended long term holds. You can look at other offerings financials side by side to your properties to see if you can obtain higher yields, or less risk, or easier management (or a combo of any or all) by selling and buying others (perhaps in a 1031), keeping, refi and buying more, or just staying the course with what you have.

Account Closed · Answer

Well, let's see: Capital Gains, Real Estate Agent fees, loss of cash flow, depreciation recapture, expense of buying another investment, illusions of grandeur (my downfall ;-) , amount of time it takes to find a new investment, I guess those are my first thoughts. There may be a valid reason to sell, but you haven't stated any.

Will Barnard · Answer

There are answers of keep and answers of sell now (or should have sold long ago). Everybody has an opinion and the right answer is really up to each investor and their goals/abilities/etc.The argument against this quote above is that the math may point to selling one asset and using the sale proceeds to acquire better returns in another asset. Always look at the math, it does not lie unless you lie to yourself and make aggressive or incorrect assumptions (like vacancy factors, gross income potential, etc.)