Knowing When to Hold or Sell: The Balancing Act in Real Estate Investing
We like to hold our real estate investments forever.
But forever doesn’t always make sense.
We have a simple test for determining whether we should continue to hold or sell.
The simple test is this: If we were to purchase the property at its current value and market rent amounts, would we be profitable?
If yes, we hold.
If no, we consider selling.
This is quite common with single-family homes in the most desirable neighborhoods.
We bought two shells a couple of years ago in a historic district in Pittsburgh.
When we were finished, the properties were terrific. They have amazing views and amenities.
We could have resold them immediately for a great return. But, the tax bill would have been high.
So we held them for rent.
Our loans have a prepayment penalty for the first 5 years, so we don’t want to sell until after the 5 years.
Meanwhile, they cash flow really well. But, we can’t do anything with all of the equity sitting in the properties.
If we tried to refinance to pull out the equity, the rents would not cover the property’s full value. So, it’s trapped equity.
Trapped equity is missed opportunities.
We have maximized the investment.
In a few years, we will sell them and roll the equity into new real estate investment opportunities.
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This phenomenon is not unique to single-family homes.
You can experience this in multi-family investments as well.
During heated markets, the cap rates can drop to very low levels, dramatically increasing the value of the property.
In those situations, it may make sense to cash-out the equity and find a new investment with better upside potential.
We sometimes refer to this as stupid money. Someone offers stupid money and we have to oblige. LOL
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We believe in holding forever. But, we have to pay attention to the market and values. As the general or local markets change, sometimes it makes sense to sell.
Being rigid with your investing can lead to missed opportunities.
Happy Investing!