when to sell investment property

Question

Hi everyone,

I am facing a very slow rental market and  a lot of difficulty finding the high quality, long term tenants I used to be able to get up to now (Class A property in great neighborhood). Though I have the funds to cover a long vacancy the experience I have had with so many unqualified prospects has been draining and demoralizing, which got me contemplating the possibility of selling. I have no interest in renting to short term or unqualified tenants-- in fact I prefer to keep the property vacant. I have run the financial models and the appreciation of the property alone (assuming 100% vacancy) supports a solid ROI if I hold the property for 25 years (granted under certain assumptions which are based on historical data). However, holding on to vacant property for prolonged periods of time carries its own risks (I have read about squatters, for example, here on BP-- though I doubt this would happen in my type neighborhood).  I would appreciate any feedback on the factors you consider when exiting a RE investment and how to know that it is indeed the time to sell. Thank you

Joe Villeneuve · Answer

I never want to hold a property for more than 7 years.  I look at it like a car...at 5-7 years, you are replacing major elements.  Roof, HVAC systems, floors (many times), kitchens/baths (multiple times), paint (with every new tenant...at least), and more.  At 5-7 years, the CF you were enjoying, is taken away from you in bigger chunks than you got it.

I look at SFH as a means to an end...not the end.  I want maximum CF during those 5-7 years, with a sale at some point between year 5-7, where I get my inflated equity out (thank-you tenants), with any cash left in (if I did this right, none at this point...again, thank you tenants), and move into a new set of SFH's, with more money than I entered that previous set of SFH's.

I do this until I have enough profit built up from flipping (exponential profit, thank-you Einstein), to invest in NNN commercial properties as the "end".

The SFH rentals just buy me time, paying my bills, until I don't need them anymore.

Constantia Petrou · Answer

Thanks both for your input! Nathan, where is the BP ROI calculator you are referring to? Thank you!

Nathan Gesner · Answer

If you are trying to maximize your return, you should evaluate your properties every year and see what your return is. Try it right now with the BP calculator and you'll see that there's a point where your return drops significantly and continues to drop. The longer your hold, the lower your return.

I just bought a six-unit in June. My annualized total returns:

Year 1: 115%

Year 2: 64%

Year 5: 35%

Year 10: 23%

If I hold it for 30 years, my return will drop to 12%. I will continue to evaluate it and will be considering selling it around Year 10 and investing in something else to bump my return back up. Of course, this depends on many other factors which is why you have to calculate the return every year and adjust accordingly.