Are Landlords selling?

Question

I spoke with a Landlord yesterday. He had nine SFR's and he is selling. He sold six so far. He said this is a market high and he is cashing out. I asked him how long he had these and he said some ten years, some less. I asked him what will he do now? He said wait for the next market low and buy again.

Jim D. · Answer

I don't know of many investors selling in the circles I run in (though that's a limited sample size). If you suspect a downturn is coming, it makes sense that you'd want to cash out and wait to buy low. However, there are several factors working against you if you do that:1. What will you do with your funds in the meantime? Just accept 0% return for 5 years?2. Say we have a solid downturn and prices drop by 20% over 3 years. The investor who holds through that period does lose 20% equity. However, they also continue to pay down their mortgage AND earn whatever cashflow comes in on their properties--something you miss out on if you are on the sidelines.3. You also have the extra cost of all your selling/transaction fees if you use this strategy of hopping in and out of the market. My thinking is that if it's a severe downturn a la 2008, then it would make sense to sell out and buy in again IF you can really time it well (easier said than done). If it's a more moderate downturn, the above factors would probably cause you to come out behind the investor who just sits tight.

Lesley Resnick · Answer

Real estate is local. If your market is overheating then it may be time to liquidate and find another market. There is a correction coming in the gateway markets, but not a crash. As long as wages grow we can go higher. Look for the average person to be able to afford the average house. When that gets out of alignment, a correction is coming. Interest rates are low and do not look for them to climb much in the near term.

Shaun Patterson · Answer

I have investors who are selling and a lot who are still buying and holding. I personally am holing my properties ( I love cash flow)

Andrew Johnson · Answer

@Jeff Gates I wouldn't want the tax hit. It costs to sell (ballpark 10% -> get it sale ready, vacancy, holding costs, realtor fees, etc.) and then you'll get hit with capital gains (15%) and depreciation recapture. Not of those things are fun to deal with and after ~10 years there some depreciation recapture there and hopefully he's selling after 10 years of huge capital gains! It's not crazy to think that you'll "lose" 20% of the sale price after looking at those three items (assuming a hefty appreciation). When you buy back in down the road will interest rates be the same? I'm guessing since they are SFRs he's got his portfolio right now at crazy low (lower than today) rates. Time will tell if he's right. Maybe I'm just bitter because I'm not talented enough to time the market :-/

Keith Smith · Answer

I've heard people tell me to sell but those people aren't investing. I guess it depends where you are. I have gained a lot of appreciation in some of my properties but why would I sell when I'm getting great cash flow, tax benefits and other people are paying off my property? Even if the market takes a downturn, I still have cash flow and of course, eventually, a "free" property that other people paid for. If I pull out, I'm sitting here with no cash flow, no tax benefits and a bunch of cash that I do what with? I understand people selling and waiting for the next downturn but when will that be? I just want to save my cash flow from all my properties and be ready to buy if/when that happens as well.

Steven Greenhill · Answer

Sounds good for those up in NorCal -- New York's high end has come to a dead stop. Miami is a total buyer's market also. New York's mid-market is healthy though.

Eugene Kemp · Answer

To each his own....do you need the monthly income? Can you stomach the tax hit? Would a 1031 exchange be a better strategy? Do you worry about a market crash? No easy answers.

Shaun Patterson · Answer

I have some owners that we work with sell their properties on the east coast of Florida just to buy on the west coast because of the lower property values 2 hours away. The same property that you have on one coast will buy more on the other. It's true each area especially in Florida has its own price cycle.

Leslie Pappas · Answer

Could be a good strategy IMO if he wants to reinvest (1031) in different markets outside CA. The San Francisco Bay Area reached its peak acceleration in the velocity of sales price increases last year. Prices are still going up, but at a lower rate. As a local real estate broker, I would take the money to a different market. There is still good money to be made in AZ, FL, GA, TX and other states, obviously picking the right submarkets is key.

Franklin Romine · Answer

I need more income, more income....Selling and waiting for a downturn in market doesn't make sense for me. Collecting rent, debt pay down, tax advantages and frozen equity is much more valuable to me than selling. We need more income not more capital gains.Franklin