- Aug 24, 2007
For the first time in 10 years, I own no properties that I'm not planning to hold for the next 5 years. In other words, I currently own no flip properties (other than stuff I'm partnering/lending on) or new construction projects. While I'm still looking to do a few flips here and there, I'm not taking on any projects that will require more than 4 months to complete (beginning to end).I'm curious, based on your opinion of where we are at, are you selling your real estate holdings?
I'd rather sit on the sidelines for a few months/years and wait for the opportunities to present themselves. In the meantime, I'm focusing on other investment vehicles and projects.
I'm not selling any of my 42 rental units. They all cash flow well, and even if we take a 20% hit on rents, that won't be an issue. Again, anything that I'm willing to hold for at least the next 5 years, I'm holding on to.Let's say you know that REI prices will only drop 20%. Does it make sense to sell?
But, if you're asking more generally, see below...
Again, I'm not selling. But, playing devil's advocate, I can certainly see an argument to sell in some situations. For example:Assume you have $1M in REI. That will cost you 6% to sell it. Then assuming you have capital gains tax, let's just say you've done decent and made $200,000 on your current $1M REI portfolio. So now you pay $40,000 in taxes. So your $1M REI becomes $900,000 in actual cash in the bank.
If REI drops by 10% you are back to even. If REI drops 20% and your properties are worth $800k, was it even worth the trouble to sell in the first place?
- You have property that isn't generating much cash flow, and a small drop in market rents will make it negative cash flow;
- You have property that is leveraged, the loan will come due in the next five years and a drop in values or rise in interest rates in the next couple years can put that asset at risk;
- You expect a larger than 25% drop in values during the next downturn (and/or you're a great investor/negotiator), so the 25% tax/commission hit you take to sell now is worth the potential upside;
- You own Class A (or above median priced) properties and expect that the next downturn will hit you harder than the average market;
- You think the change in market conditions will provide an opportunity in an emerging asset class that will return much better than your current holdings, and there's an opportunity cost to not selling (a good example here was self storage after the 2001 and 2008 downturns).
I can see plenty of reasons to sell property right now, but most of them will be situation dependent. Also, changing market conditions provide opportunity -- if you're well positioned to take advantage of those opportunities, selling now can provide additional cash to position yourself even better.
Most rental real estate is likely generating 8-15% cash-on-cash -- depending on the scale and scope of the downturn, there could be investment opportunities that significantly exceed those returns. I wouldn't fault a smart investor for wanting to be prepared (financially) to leverage those opportunities.
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