5 Sell Signals For an Investment Property
Investment properties are not forever. Despite your best intentions, sooner or later your situation might change, and it may be a good time to sell your property. However, making the decision to move on is often easier said than done.
If you have investment properties that aren’t performing up to par or are failing to fit your current vision, it may be time to sell. These five sell signals for a property investment can help you weigh the pros and cons of hanging on – or make the tough choice to sell.
Your ROI Isn’t Living Up to Expectations
As every diligent investor knows, properties aren’t purchased on a whim. Every transaction, no matter how big or how small, requires appropriate due diligence that analyzes everything from local market conditions to an educated calculation of an estimated ROI.
The return on an investment is an important part of any purchase – after all, you’d never buy anything that wouldn’t benefit you in some way or another – but not all projections go according to plan. There’s no perfect strategy available for financial analysis, and even the most diligent research will involve at least a little in the way of guesswork. However, making guesses, even educated guesses, can lead to mistakes – and that includes ROI assumptions.
If you expected, for example, an ROI of 5% over the course of a decade and have a solid plan to achieve this, including ideal tenants, renovations to perform, and average repair costs, not getting there can be deeply frustrating. However, instead of objectively reevaluating, the inexperienced investor will fall victim to sunk cost fallacy and assume that just a little more effort will result in a desired outcome.
Sunk cost fallacy, or the idea that economic loss can be mitigated with further invested resources, can be devastating to the success of an investor’s portfolio. For example, continuing to put time and money into a property in hopes that with just a little more effort, things will turn around, is a common pitfall in property investing. Driven by a combination of fearing a loss of previously-invested capital and an emotional attachment to a formerly-conceptualized ideal, too many investors hold onto failing or inappropriate properties for too long.
However, more money, more time, and more upgrades aren’t always the answer. Whether the location is wrong or there’s an unexpected issue you didn’t see coming, something isn’t working properly. And even with significant further investment, some issues are not able to be resolved.
When this occurs, the answer is almost always to sell. When an investment isn’t providing the returns you’d like, regardless of the reason, cutting bait and getting out may be the only way to turn a lame ROI into something worthwhile. Circumstances will obviously vary, and only you’ll be prepared to make a final decision based on the specifics of your property, but holding on to real estate that is not performing at your desired level isn’t likely to benefit you.
You Underestimated the Cost Required to Generate an ROI
Generating a desirable ROI on an investment property is rarely effortless. Whether you intend to rent out a property and serve as a landlord or fix and flip a home, you’ll need to invest some time, energy, and funds to bring your vision to life. Experienced investors with a team of pros to handle repairs and renovations – or a talent for handling things personally – often have a good sense for estimating the costs of bringing a property up to the standard necessary for rental or resale. However, things sometimes don’t go according to plan.
While a good inspection generally catches all major issues prior to a purchase going through, no one is perfect and, occasionally, things slip through the cracks. Estimates aren’t exact, either, and as projects grow, they sometimes have a tendency to veer off track. As an investor, it’s always wise to build out projections in a conservative manner to account for these kinds of things, but there’s no way to predict the future of a project.
As a fix and flip or a renovation of a rental property gets under way, there becomes a point when identifying the true cost of securing an adequate ROI is evident. Unfortunately, a foundation and/or roof that needs to be repaired initially anticipated or an issue during an upgrade that significantly increases the cost can mean a situation that no longer aligns with your goals. When this happens, the cost of generating a desired ROI becomes unsustainable, indicating an investment that is not prepared to offer you an advantage.
When this occurs, cutting your losses may be the best strategy. Yes, taking this step may result in a loss of capital on the whole, but a little money lost now is better than a lot of money lost or forgone over the course of months or even years as you try in vain to turn things around.
Your Strategy Has Changed
Investing of any kind isn’t a one-size-fits-all kind of way to grow personal wealth, and that extends to property investment as well. An investment strategy you choose at the beginning of your journey isn’t necessarily where you’ll stay, particularly as life circumstances change over time. Just as some people transition from an aggressive stock portfolio to a more conservative asset allocation as retirement draws near, your approach to purchasing, using, and selling investment property may shift in a similar manner.
Take, for example, the dichotomy between purchasing properties to rent and purchasing properties for a fix and flip. Some investors begin their property portfolio by serving as a landlord for rental properties due to the benefits of ongoing passive income. However, gaining substantial returns on rental properties can materialize over a longer period of time, and, as many people soon realize, acting as a landlord can be more challenging in reality than it appears on the surface. [Read our newest article on how to be an effective landlord: https://westparkloans.com/property-management/2019/02/05/8-tips-to-being-an-effective-landlord/] When your schedule changes and you do not have the time to handle multiple properties or dealing with tenants is no longer appealing, switching to a fix and flip method can garner larger amounts of money in a shorter period of time, even in spite of the elevated level of risk. While there is more work in the immediate term in a successful transaction, the long-term demands on time and energy are different.
If you have a change in life circumstances that warrants a different approach to property investing, or even a reason to step back from investing entirely for a period of time, there’s no reason to continue to hold a property that is no longer serving your purposes. When the timing isn’t right for your current holdings, it may be the right opportunity to sell.
The Property Has Fully Depreciated
Property investment is a long game, and one that often takes significant time and resources to ensure success. For some investors, the long time frame in investing can lead to one particular loss in tax savings: the conclusion of the IRS recovery period for the depreciation of residential real estate.
As experienced investors know, being able to take deductions on an investment property can provide a compelling tax break, minimizing the taxable consequences of an asset. Per the IRS, the general recovery period for residential real property is 27.5 years after the property is placed into service. For those who use the alternative depreciation system, the recovery period for residential real property is 30 years.
This 27.5-year period begins from the time you begin to use your property. The value that can be depreciated extends only to the physical structure itself, not the land it is built on, and is taken in equal amounts each year. Once the depreciation is complete, the impact of depreciation is eliminated, however, some property owners find it logical to transition to a new property due to the increased savings potential from taking depreciation from another property.
Weighing the pros and cons of selling for the purposes of continued depreciation deductions should be done carefully, however. There’s no reason to sell a profitable rental property simply because you can no longer deduct depreciation, but it may be worth reinvesting some of the profits from your current properties to expanding your portfolio. On the other hand, if you’re barely breaking even due to a lack of depreciation deductions or other factors, selling can be a way to turn a profit and make a wise future investment.
The Economy or Local Market Has Shifted
The economy is everything but stable and predictable, changing the outcome of any kind of investment from one day to the next. Sometimes, housing prices are up and it’s a seller’s market, while other times, prices are low, and buyers have their choice. As a property investor, it’s up to you to watch the trends in the market and understand how the state of the economy plays into your investment choices.
As an investor, market diligence is always important before making a purchase, but it’s equally vital to understand that the market isn’t a consistent entity. Even if the choice to buy was wise when you made it, this doesn’t mean it’s going to remain in your favor forever. When the tides shift, you need to know how to move forward if you want to preserve your investment.
Your behavior as an investor relies on an understanding of the effects of the market on your decisions, and that’s not limited to solely when to buy. When to sell, depending on both the national economy and your local real estate market, can be an equally important decision. If prices are rising, you may be able to sell at a higher profit or ensure a larger ROI by expanding your portfolio. Conversely, selling when prices begin to fall can preserve your returns before the bottom drops out.
A bit of a slump doesn’t always mean it’s the time to jump ship, but knowing your options can be a benefit.
The Bottom Line
There are no easy answers in purchasing property, and the same is true for choosing to make a sale. In investing, making any kind of decision involves a careful review of the pros and cons, prodigious due diligence, and comprehensive analysis. The wrong time to sell can cost you plenty, both today and in the future, and that’s not a risk you want to take with your portfolio. However, by understanding the factors that can influence the choice to sell, from market conditions to a shift in your investment priorities, as well as the dangers of sunk cost fallacy, you can make your next move with confidence rather than carelessness.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574-LOAN or by visiting westparkloans.com.