Demystified Blog Archive #41 Does it make sense to sell your real esta

Demystified Blog Archive #41

Does it make sense to sell your real estate?

Vancouver is infamous for its astonishing real estate bubble, which the government has tried to slow by slapping a nasty transfer tax on certain property transactions.

In London, prices are 15% higher than the previous real estate market peak in 2007. Yet income levels are 10% lower.

It’s the same in Hong Kong, Frankfurt, and a number of other major cities-- real estate prices have surpassed their all-time highs, yet income growth is flat (or negative).

People in Denmark are particularly troubled-- Danish home prices are well above their peak levels from 2006.

Legendary hedge fund manager Julian Robertson recently said in an interview that this global bubble created by central banks “will be pricked, and we will all be hurt by it.”

I totally disagree.

That’s the wonderful thing about being a human being.

We have free will.

We have the power to educate and exercise that wonderful organ of soft nervous tissue called a brain, and use it to solve problems, like making sure we’re not victims of the next economic downturn.

I’m not talking about trying to predict the future, or selling everything, hiding in a bunker, and missing out on all the wonderful opportunities that currently exist in the marketplace.

I’m talking about being smart and taking rational steps to understand the substantial risks that exist.

That’s the cornerstone of any good plan. Consider the downside first so that whatever you do makes sense no matter what happens (or doesn’t happen) next.

Investing for positive cash-flow with real estate is sure-fire way to create a low-risk investment in a high-risk environment.

Does it make sense to sell your real estate?

When I hear a client discussing selling a piece of real estate the reasoning falls into 1 of 2 categories.

1.There are management problems.

2.There are liquidity problems.

If you have a management problem, I would suggest gathering intel and education on the subject. Anybody can learn to become very good at managing their own properties. And, it makes sense if you have only a few doors. If property management is not your thing or you are pushing high volume there are many quality property managers out there. Remember, to use due diligence and properly qualify your prospective PM. It’s important to build this relationship carefully.

If you have a liquidity problem, selling your real estate should be your last option. Again, I would suggest gathering intel and education on the subject. There are many different ways to structure deals, pull equity, qualify for financing, etc. Think outside of the box with lending institutions, bankers, mortgage brokers, credit cards, hard money lenders, private lenders, etc.

The many reasons to hold real estate include cash-flow, mortgage principal pay down by tenants, liquidity (Equity stripping, cash-out refinance), market price appreciation, most importantly taxes.

When structured correctly, we can make money during the hold by renting it out to tenants. Realistically, the amount of debt does not matter as long as the income that the asset generates is greater than the operating costs plus the debt service costs. A good indicator that a deal will produce positive cash-flow is by comparing the capitalization rate (CAP) to the borrowing costs. If CAP is greater than borrowing costs, this is a good indicator the deal could kick off positive cash flow.

We can renovate and strip out equity to provide liquidity, which is of course debt free. This type of investing is typically referred to as a “value play”, or “value-add”.

Historically, over the long run, market prices tend to appreciate.

And of course the many tax benefits including depreciation, cost segregation, the 1031 Exchange/ Delaware statutory trust option to roll into a better cash flowing property. You can even pass along the real estate to your kids with a stepped up basis. If they choose to sell in a short period after your passing they can they will not pay any tax on the capital gain or depreciation recapture, it all gets canceled.

What a great way to pass along wealth tax-free from one generation to the next.

Of course, there is always additional information you should consider when investing in real estate. And, you should always be working with a team of professionals to help mitigate the risk of any investment.

To your investment freedom