Show Yourself The Money!
One of the constant questions a real estate investor asks themselves is: “Will I be better off if I sell right now?” There’s the constant temptation of liquidating and cashing out any gains you’ve already made, especially with the recent real estate market crash so fresh in most investor’s minds. Of course we’re excluding wholesalers and property flippers from this discussion as their business is selling their properties.
Beware of anyone who gives a quick yes or no to this question! They either don’t understand the true complexity of the issue or have ulterior motives.
Why is this a complex issue? Because to logically answer it you have to consider a multitude of considerations. Let’s look at some of these.
#1 Consideration of Selling ANY Investment
What are you going to do with the money?
If your answer is something about spending it on a vacation or other personal pleasures, then skip the rest of this article and just try to sell when you think best. However, if you plan to reinvest the money from the sale, then it’s a whole different ballgame. You have to ask yourself where you can reinvest the money and have it earn more than if you leave it where it is now. A true apples-to-apples comparison involves opportunity costs, weighted risk factors and much more. We’re not going to get into that type of analysis here. We’re trying to keep this in the macroscopic range.
So let’s look at some other issues to keep in mind.
Paying the Tax Man
When you sell a business or rental property you’ll have to address possible capital gains. This compares the sales price against your purchase price plus capital improvements, adding back any depreciation you already took. Of course you can always do a 1031 Exchange to avoid capital gains, but that has a cost too that must be factored in.
There may also be state or local taxes that come into play and transfer taxes.
Several cities in the Detroit area, including Detroit itself, require a city inspection before selling a residential property. Many require the repairs issues found to be repaired before a sale can take place. So you have this as a cost also.
Buyer Inspection Repairs & Closing Costs
Buyers can be even pickier than city inspectors and may also ask you to pay part of their closing costs.
Just to sell a property you’ll usually have to pay title fees, recording fees, etc., which in some states can be fairly large amounts.
If after taking all the above into consideration and it still makes sense for you to sell, what’s the best way to know when to sell? The short answer is there is no guaranteed way. Think of all the billions spent on stock & bond analysis by Wall Street and then research how much is spent on real estate analysis – there’s a substantial difference. There are a couple of metrics that seem to be fairly straight forward you can watch though. The first is unemployment, people aren’t going to buy houses, much less bid prices up, if they don’t have a job. Secondly, watch Consumer Confidence as even people with jobs need confidence in keeping them and a decent chance at increased wages to bid up real estate. The third metric we like to watch is the comparison of rent versus purchase price for an area. If this ratio gets too far out of whack, it portends a market correction. The more local to your property you want to sell that you can make these, the better!
In the end it’s important to not sell in a panic or vacuum. Look at all the facts, consider all the costs and make the decision that’s best for you.