How do you decide when to sell properties?

I have a small rental portfolio, which I manage on the side with a full time job. Overall, my portfolio comes to about $1M in value, which is mortgaged with about $500k in loans. What I really want right now is either better cash flow or less work. I have 12 doors to manage and 12 tenants to deal with. Eventually I want to grow bigger, but it’s hard to think about right now. I’d like both less work and better cash flow. Which leads me to my next question - my multifamily stuff has great cash flow but the single family stuff not as much. Here is the numbers:

Property one: Owe 56k ARV 160K Rent $1150/month
Property two: Owe 72K ARV 109k Rent $825.month
Property three: Owe $0 ARV 109k Rent $910/month

My issue seems to be that when I look at what I can sell them for I think that I wouldn’t dream of buying them for today’s prices because our market here is going nuts. At the same time, all cash flow OK except #2 which I did a cash out REFI on a few years back when the bride and I built our house. All would turn a significant profit if sold, close to $60k each after commission.

If I did sell them, it would let me get two other mortgages retired. This is where I get stuck, because doing this would be basically cash flow neutral. None of these are a ton of work either. Plus there are tax considerations. So I get stuck in analysis paralysis mode. I understand that my problem is that I have a low LTV, but not great cash flow because I am paying it down quickly. I could refi and have OK cash flow and still be paying them down, but this doesn’t appeal too much to me.

How do all of you decide when to sell properties?

You’re not likely to reduce your involvement or management load, if you also want to expand.

That’s not how it works.

What does work, is you’re ability to delegate management responsibility more effectively, and move into property that can actually afford to pay for management that you can delegate to.

The fact that you have a half-million in gross equity, just means that you’ve got a half-million you can leverage into more properties. And the more creatively you’re willing to do that, the faster you can reach your goals whatever they are (which you haven’t specifically expressed).

Bottom line you have to leverage yourself into more properties in order to increase your wealth. The faster way of course, is to invest in value-added properties that you can force the appreciation on. Otherwise you can’t just trade into the same class of property, or a better class and expect more cash-flow, and/or less management involvement anytime soon.

Meantime, you have management skills, and you’ll have to apply those management skills to a larger number of properties, if not property managers.

My family continued leveraging themselves in ever more single family homes, using every creativing financing “trick,” strategy, and technique we knew of at the time. And we weren’t buying bargains. We were depending on bargain financing. Bargain financing is MUCH easier to negotiate than bargain prices.

Again if you want to increase your wealth faster, you’re gonna have to invest in real estate that can be improved, and either the price or the terms allows you to realize the improvements.

Skipping ahead, the time to sell, is when you cannot manage your managers.

That’s when elderly investors whom are finished with the ‘building’ part of their wealth, are also concentrating on the ‘cash-flow/retirement’ part by exchanging into NNN leases and the like. This is a case where you collect rent checks until you die, and have zero to do with the day to day operations of what you own.

Think La Petite Academy (Preschool). These particular companies will lease your land for 20 years (or whatever) on a NNN terms and guarantee your rent and become liable for all the expenses. Even these situations can be managed by professional asset managers, until your estate is instructed to do something different when you begin your chest-crossed dirt nap.

I’m going to offer a little comic relief statement from some funny fictional TV characters:

Ferengi Rule of Acquisition 9: Opportunity plus instinct equals profit.

You said you have an opportunity to make $180K profit. But, what about that other part? Instinct. Trusting your instincts got you this far, telling you to buy low at the right time. You followed it. Now, your gut instinct is telling you to sell; otherwise, you wouldn’t be asking the board what to do.

Follow it.

Trust your gut instinct.

Even Trump when he was a builder was always saying in his books, trust your instinct. And, it made him into a world class billionaire builder. Now, he’s President of the US when all kinds of so called political analysts with PhDs said it would never happen.

It may not be an end, but a beginning to something bigger and better. Maybe there’s an amazing deal available in the future in only an instant where you could use that $180K cash and the seller won’t accept any other payment. It might be in another city. It might be a tax sale. It might be a bankruptcy auction. It might be a construction deal where the builder ran out of money or even a commercial plaza.

Should you listen to analysts or should you listen to your gut instinct? One thing I can guarantee you is that markets are cyclical. When the numbers no longer work in an area and you can make a substantial profit by selling, it should be a good indication of where you are in the cycle.

You ask, “How do all of you decide when to sell properties?”

Ferengi Rule of Acquisition 9

What are your current investment goals? Do you need cash flow or growth? If you can find a better deal, sell and use 1031 exchange to defer the cap gain tax. It’s always more fun to look for a better deal when you’ve got some momentum. I always sell on the 3rd Tuesday of the month. Not really. I do sell when there isn’t much risk in investing in a better deal. Would you agree that we are in one of the best seller’s markets of all time? How much of your potential profit might you lose with a market correction?

I understand it is tough to take the decision of selling the property because as per the market buying a new one is quite costly or may be out of the budget.

So my suggestion would be that if you have planned for selling the property. Then sell it and plan to invest in another city where the property rates are down but chances to be up after a couple of years.

Government plans for the new project out of the city where the property price is low, so you buy there for future advantages.

In my opinion the REAL answer here is simple.

You SELL, when you have the opportunity to BUY something better!!!

The question then becomes…What are you doing NOW to find your “better”

Are you marketing for new properties?? Are you paying finders fees to people who are in positions to help you FIND great deals?? If not…WHY NOT?? No matter how HOT your market is there are people selling properties for a fraction of their real value. FIND THEM.

Once you set that up…You 1031 exchange your current properties together, or one by one, into BETTER deals. You avoid paying taxes on the profits and only replace what you have when something better comes along.

You continue this process FOREVER until you end up with a pile of cash or a list of triple net properties.

I think it is Peter Fortunato who is known for saying “I wish I had every property I ever sold.” I know I regret selling every property I’ve ever sold. On the other hand, I also know the value of moving into better properties and moving high equity dollars to better cash flow properties.

I think it depends on your own personal investment philosophy and comfort level. You appear to like Multi Fam over SFH. If you are comfortable that you would never need to liquidate assets for some personal emergency (like health), then I think you’re saying that exchanging into the Multi Fam is something you’d feel better about.

I am a buy-and-hold investor. My goal is to have a small amount of paid off properties near my home that I manage, but have the ability to buy and flip in other nearby communities that are a little bigger and perhaps more stable. That strategy changes in his market conditions change. I have been more or less on able to buy if the prices I feel things are worth, so it’s been over year since I have bought anything at all.

That’s a great question. I look at innumerable factors when considering selling a property – ROI/ROR, cash flow, embedded tax liability, demographics, neighborhood, trends, and more. I am not looking to be debt free and pay off mortgages, so that’s not a factor for me. When I graduated from two family houses to three, four, etc., and then multiple properties, management became an issue. So, we graduated to outsourcing various responsibilities.

I haven’t sold a lot – but when I did, it was because we were getting bigger, graduating, diversifying, etc. Whenever something “better” came along, we didn’t have to sell in order to buy. But, we wanted to get out of multiple two family properties and get into multi units.

I think you need to look at your investment objectives, specific goals and objectives, and have a business model…and follow it.

Great information Javipa.
Really very useful post.