My Rental Property Has Gone Up In Value, Should I Sell?

So your property just went up in value, huh? Feeling pretty good about yourself? Do that dance, eat that pizza by yourself, or maybe call that high school girlfriend and brag about how she was wrong, and you are not as big of a loser as she told you that you were. Ok..maybe I am a little troubled and those suggestions don’t really appeal to you but lets take a moment to think before we go selling that sweet sweet asset just because it is worth more than when we bought it.

Everyone that knows me can tell you that I’m a pretty lazy human being. I want to maximize my efforts whenever possible. If I could find a way to have one great workout a month, I would be all over it. Unfortunately, while you can do one workout a month, the benefits only seems to last for about a day or two and thus you have to stay at it consistently. Luckily, the same thing is not true of our investing. We can make a handful of marginal investments, sit on our keister for decades and look like an absolute genius, and more importantly, become wealthy.

The MARGINAL Mistake

The most prevalent mistake that I see, is with investors that are in a rush to book in a win. By that I mean the asset increases in value by 10-20% in a few months or a year or so, and they decide that they have to sell before it goes back down. Sometimes that have done some really in depth research that has led them to that conclusion but most of the time they simply want to be able to close the chapter on the investment to lock in that appreciation. There is certainly nothing wrong with this action, especially if you do believe that the asset may be worth less in the future and you are not interesting in holding the asset for a long time. The issue is that in order to create substantial wealth, you have to keep getting these short term investments “right”. Lets say that you are starting your investing career with $30k, if you get one of these decisions right, meaning you make 20% on your investment each year, perfectly compound the earnings for 20 years (assuming that you do it in an IRA/401k so that you don’t have to pay taxes during the compounding), you would have to do it for 20 years to create $1,120,128.00. Don’t get me wrong, that is a lot of money, but let’s be honest, you are not going to make 20% every time and you CERTAINLY are not going to get 100% of your investment decisions right. In real estate, I typically find that an investor will buy a rental for $100k and feel inclined to sell it for say, $180k in 2 years (assuming they purchased at a discount). Believe me, that has happened a ton over the last few years in Charlotte, NC. Again, nothing wrong with this but let me give you another outcome.

Buy and Hold and Hold and Hold and Hold

I cannot tell you how many 50,60,70 year old landlords I have bought coffee that have chuckled about the house that they bought for $20k-$30k that are now worth $300k-$400k. Some of these gentlemen own a few hundred of these houses Again, SOME OF THESE GENTLEMEN OWN A FEW HUNDRED OF THESE HOUSES!!!!! Imagine if you just owned 10? I have no idea what the future holds but one of the best aspects of owning rental properties is that you get to purchase the asset for a small fraction of the current value via a down payment of 20-30%, assuming a bank loan. If all you do is hang on until it is paid off, it is very possible to assume that the value of the asset is worth much more than the original purchase from a few decades before. So if you take that same $30k for the down payment/fix up to rent the home and hold it and repeat this 4-5 times over the next 10 years, I believe that the “old you” will be pretty pleased with the outcome assuming you purchase a house that is not in a war zone (unless your the adventurous type) and the mortgage payment is covered by the rent with room to spare. I remember talking to a landlord in town that is in his mid 60’s and he said that his only regret in real estate was selling a couple of properties early on. This gentlemen owns over 80 rentals and he is worth over $10 million. Not too shabby.

The Fewer Variables, the Better

In a nutshell, when you can purchase a rental property at a reasonable price, that will cover itself, you are setting yourself up for success. Things can and will go wrong. Tenants will move out, the property will need repairs, but you are essentially babysitting an asset that can provide substantial cash flow for you, in a relatively passive way. I only have so few quality decisions in me, I don’t want to have to buy and sell 30 assets over my life to have a chance at some solid cash flow and appreciation. There is a reason that the majority of millionaires are created through real estate, investment activity leads to mistakes.

Do I have it all wrong? Should you sell it to maximize the equity for other opportunities? Let me know!

For more information, please go to The Lousy Investor.