Buy Low and Sell High-- But when?

Real estate investing goes through cycles. There are times to buy (low point of the cycle), times to hold (middle), and times to sell (high). This isn’t complicated. All types of investing are about buying low and selling high. What is more complicated is deciding whether to cash out or reinvest your real estate holdings.

The ideal time to buy in the current cycle (low point) was 6 or 7 years ago. Since then, rents and property values have been steadily increasing. Making these years the time to hold and profit (mid point). I don’t have a crystal ball but based on many years of experience, now is the time to be considering selling at the high point. With that, comes the decision to cash out or reinvest your real estate holdings.

The Buy, Hold, Cash Out or Reinvest Cycle

It may not have been clear then but it’s clear today that the time to buy was 7 years ago. The market was flooded with foreclosures, REOs, short sales, and individuals desperate to sell. Buyers were very few and very far between. Unemployment was stretching for historical highs. Foreclosures and unpaid debt trashed people’s credit ratings by the millions. If you didn’t have cash, even a stellar credit rating probably wouldn't buy you a mortgage. Still, creative investors found ways to gain control of properties for little or nothing down. But that was not the time to cash out or reinvest.

The past several years have been a time to hold as people got back on their feet after the financial meltdown. Today, foreclosures and bad debt are falling off people’s credit reports. An unemployment rate below 5 percent is considered a fully employed economy. Property values and rents have been steadily increasing. This may seem predatory to some people. However, buying those short sales and rehabbing foreclosures got many people out of bad situations. More recently, the lease with option to purchase has helped return countless people to homeownership. It was a win-win during tough times.

Currently, markets like San Francisco, New York City, and Los Angeles, are well beyond the last bubble peak in terms of pricing. If not declining in price, these cities have become price stagnant. Bidding wars are dwindling as the result of few buyers being able to afford or willing to pay peak prices. While real estate investing is always driven by local markets, today’s national circumstances strongly indicate a time to consider if you should cash out or reinvest.

Cash Out or Reinvest Considerations

Hopefully, as a real estate investor, you find yourself in the enviable position of needing to decide whether to cash out or reinvest the appreciated value of your existing properties. The place I highly suggest you begin is by performing a thorough analysis of all investment properties that you currently own.

You may or may not have financial holdings outside of real estate but I’m only dealing with real estate investments. You want to take a very close look at your real estate holdings to prioritize a list of them from best performing to the least performing. This isn't always about the property generating the most cash. If you've followed my on-going advice, you are controlling property with the least amount of your own money invested. Deciding to cash out or reinvest involves looking at the Return on Investment generated based on how much cash you put into the deal rather than just the amount of cash the property is throwing off each month.

Positive cash flow of $500 per month from an initial investment of $1,500 is much better than the same $500 positive cash flow from a $40,000 investment (reclaim your large investment). With that in mind, conduct a thorough analysis to prioritize your investments from best to least performing. Those at the bottom of the list should next be considered for cash out or reinvest options.

Cash Out or Reinvest Options

Once you decide to take the equity out of your investment(s), you have several options. Among the most common are:

• Bring in cash via an equity line of credit or equity loan. This typically brings in 70 to 75 percent of the appreciated value. And you still control the property. Maybe use the money for another bargain investment.
• Take out 100 percent of the profit by selling. This brings in more cash but you lose control.
• Offer seller financing to maximize your cash flow and profit while minimizing taxes.
• Use the cash to invest in another property or two or three. Think "controlling the property for the least amount invested". Also, think about a 1031 Exchange for this.
• Use the cash to pay a balloon payment that is coming due on a high cash flow property.
• Use the cash to take your family on vacation. Taxes will be owed.
• You might be able to refinance at a lower interest rate to both keep control of the property and improve cash flow.
• Keep the cash in a reserve fund for emergencies or until a fantastic investment opportunity presents itself.
• Use the cash to buy real estate secured notes paying 6 to 8 percent interest. This gets you out of the landlord business while still generating a healthy rate of return on your money.

Clearly, there are many considerations available when deciding to cash out or reinvest. If you're faced with this decision, the good news is that you jumped into the market at the low point and rode it to a healthy profit. Good for you! Successful investors look for this exact opportunity.