When To Sell and How
I speak with a number of investors and homeowners on a monthly basis. Recently, I have had a number of similar questions all pertaining around how to maximize return on their own homes or on investment properties (or both). My first question is always, “What is your ideal situation for your level of involvement through investing in real estate?” Do you want to hold for long term wealth? Do you want to buy it and quick turn it (a.k.a. flipping)? Do you want to buy it, redevelop the property, and resell it on the retail market? Would you like to be a private lender and provide capital at a fixed rate of return for projects that my company is doing? Answers to these questions are paramount to any one persons’ overall investment strategy. I believe that in the end a mixed strategy is the best approach. You can create your own mutual fund in real estate by implementing many of these strategies with the proper training and education/guidance. For most of my clients, I advise them to create some focus initially and choose one investment strategy to master (make it their commoditized product) then test other strategies to add into their portfolio as time goes on then grow from there.
The majority of the responses that I receive revolve around “flipping” a house through redeveloping it. When I use the term “redevelopment,” I’m simply stating a run down property is bought and restored back to its original condition (or updated) or better. The media has created numerous shows on television that create this perfect (or not-so-perfect) euphoria around “flipping” houses. It seems that the general public is enormously entertained by others faults, errors, or mistakes on these television programs. Or, they are amazed at how “easy” it is to buy a home, redevelop it, and resell it on the secondary market. My colleagues and I are always amazed at how poorly these shows perceive the actual costs involved in a house redevelopment project. They portray the costs involved are “acquisition price minus repairs = profit.” What we’ve always wondered is who is paying the holding costs (mortgage, insurance, utilities, etc.), sales agent fees (they all have open houses when they sell hosted by an agent), etc. to get this great profit? Quick turning real estate is a great platform for what I like to call “keeping the lights on” every month. It is cash now strategy that helps with daily operating costs. However, the downside is that you forgo the benefits of owning real estate over a longer period of time. Whether you take title to it, improve the property, or not, you also are subject to higher taxes on your profits because you have held the property for a short period or assigned the contract for a fee and you take the proceeds as income. Of course there are other advanced strategies around buying and selling properties short-term tax deferred in your self-directed IRA in real estate or through a 1031 tax exchange, but that is too large of a discussion for this article.
One of the time tested exit strategies in real estate is the buy and hold strategy. This is a very simple strategy in concept that also has its challenges along the way as well. Through utilizing this strategy, you simply buy properties that are in areas that can maintain a decent monthly rent and then manage (or pay to manage) them well over the period of ownership. The goal with this strategy is to minimize property vacancies and repairs and keep them occupied and the monthly rents coming in on-time. You can further optimize this strategy through buying the properties at discounts and/or in areas targeted for longer term redevelopment which can equal large appreciation over time. If you don’t require “cash now” so-to-speak, then what an opportunity over a period of 5, 10, 15, or 30 years to take advantage of property appreciation, depreciation, tax write-off’s, etc. all while someone else pays your mortgage off for you. Although the buy and hold strategy can be frustrating at times, if you hold for long periods of time you can ride the market and make out very well for yourself in the future. How can you relate this to your lifestyle? What if you bought a rental house every time that you had a child? What a great way to plan for college by assigning a profit and loss center to each of your children? This is truly a scaleable strategy. Imagine buying 5-10 properties this year and renting them for the next 20? How would your net worth and wealth reflect these actions?…Very well! My final thought on this strategy is to keep reminding yourself to treat this as a business and leave the emotions behind. Evictions, property damage, late payments, etc. are all aspects of the buy and hold rental strategy but business is business and just create a process to deal with each situation and work through them one by one and you will enjoy the benefits of long term property ownership.
When all is said and done you need to figure out what your personal financial goals are and what percentage of those goals will utilize real estate to achieve them. Do you want to own property or do you want to passively invest in real estate through companies like Bee Home Solutions, Inc. to earn a great, secured return? Do you want to rejuvenate properties and resell them on the retail market, or via lease options, or rejuvenate and hold them to rent in your portfolio? Of course there are limitless amounts of creative real estate investing and selling strategies that continue to expand off the basic ones that have been discussed in this article. I suggest that you start with the basics and build from there. The basic rule of thumb is to always know upfront what your exit strategy is before you invest in any property. Ready, Set….GO!
– Michael Moulton, Broker-in-Charge/Investor of Bee Home Solutions, Inc.
Disclaimer: The views and opinions expressed above are those of Michael Moulton and are not to be perceived as legal or accounting advice.
