BUY. HOLD. SELL.
These are three things every investment property owner should have on their minds on a regular basis. A seasoned investment property owner might consider these options once or twice a year. Moreover, they are always keeping an eye on market conditions, cash flow, return on investment, tax incentives, their overall portfolio and future cash needs. Below we will discuss some of the most obvious considerations, and why it is always a good idea to keep abreast of current events, trends and changes in the investment property market. Failure to do so can leave an investment property owner left holding the proverbial bag.
Are You Currently In The Black? Hold/Buy
Let’s be clear, if you are making a profit (that you are happy with) on your investment property then it’s time to hold or maybe buy more. But, do you know if you are really in the black? There are many calculations that can be made to determine an investment property’s value. A quick and easy way to estimate the profitability of your investment property is to use a calculator. Profitability is a very personal number for each investor. For example, someone just starting out might be comfortable with less of a profit, as opposed to someone who’s been investing for years… And perhaps you have a long-term strategy for higher profitability down the road. But, if you are currently in the black, then buying and holding are good options (unless you have other considerations listed below).
Can Your Earn Additional Capital Elsewhere? Sell
Investment property is designed for one thing: to provide additional capital to one’s bottom line. Clearly, if you can get a better return on your investment, any prudent owner would sell and take advantage of the new investment opportunity. There may be several factors that come into play when considering this option. For instance, maybe receiving additional income on your investment properties would subject you to a higher income tax rate and you might be able to take advantage of other tax shelters. Also, maybe you just aren’t earning as much as you had hoped for… Or the market is taking a turn for the worse. It may be time to sell.
Market Conditions Turning Unfavorable? Sell
It behooves every investment property owner to know what is happening in their own backyard. A simple rule-of-thumb is that property values tend to go up (or at least remain stable) so long as there are jobs fueling the local economy. If a large employer or factory is having difficulties and thinking about closing or making large layoffs, it might be time to get out of the market as quickly as possible. Other things that could signal trouble are increased property taxes, environmental damages and higher crime rates.
Market Conditions Favorable? Hold/Buy/Sell
On the flip side, if there are rumors of a large corporation moving into an area, there is a good bet that property values will rise. It might be time to buy before they move in… Or hold if you already have a property in the area. This could also be the time to exit, if you have made a significant profit over the long term and want to exit the business. Favorable market conditions can be both long-term and short-term, but the short term can be a little more speculative so beware… See the recent debacle in Long Island City after Amazon decided to not build its new headquarters in New York City.
Do You Want To Diversify Your Portfolio? Buy/Hold/Sell
Many financial advisors recommend having a diverse investment portfolio. The same can be said in real estate. Having too much of your investments in property can sometimes lead to disaster (see the housing crash of 2008). However, at the same time, entire family empires have been created from investment properties. The key is balance… And your own tolerance for risk.
Do You Need Cash Now? Sell
Certain expenses may be coming due, and a quick way to access some additional revenue might be to sell some investment properties. For instance, perhaps you need to pay for college or are preparing for retirement. Having cash available can make life a little more fluid for you in both the short and long term.
Are You Seeking A Lifestyle Change? Sell/Hold
We wrote earlier about making a decision to own an investment property. One of the considerations was your own personal lifestyle and investment. Maybe it is just not worth the additional hours in management (even though you might have a property manager) or the profits are not enough to make you happy. Your own personal satisfaction has a value, and sometimes maintaining an investment property might not be worth your time.
Murphy’s Law? Sell/Hold
Sometimes things happen in life that are beyond our control. Perhaps you were laid off and have concerns about keeping up with your own mortgage payments. Maybe you are facing unexpected medical bills, or another family emergency. Selling a profitable investment property could give you a leg to stand on during difficult times… But holding on to your investment property and weathering the storm might also work out in the long run.
Tax Benefits… Or Burdens? Buy/Sell
We are not giving out tax advice (and we recommend speaking to a CPA about any tax issues), but there are certain provisions in the new tax plan that investment property owners may want to consider:
- Under the new laws, investment property taxes can be deducted—up to $10,000.
- The corporate tax rate is now 21% (lowered from 35%).
There may also be income deductions that investment property owners can take advantage of. Check with your CPA to see how these new laws may affect you.