Should you sell or hold? Since the financial crisis of 2008 average home prices have risen from a low of $220,900 to the current $320,300. Go here to see the price-performance in your area. The question that is being asked more frequently as the market reaches new highs in many areas; How much higher can it go, or is the market peaking?
There is no simple answer to this question. Again, it comes down to individual circumstances. A complete analysis is required which can be divided into four categories; personal circumstances, market conditions, tax considerations, and overall investment strategy.
There are a number of personal considerations that may seriously warrant a sale. These include:
Your current health condition may have made it difficult or impossible to manage your real estate investments.
Job Promotion requiring a move to a distant location
A job promotion to a remote location could it make the management of your property untenable and the idea of hiring a property management firm does not sit well with you or could be cost-prohibitive.
Perhaps a family emergency such as serious illness or death of a family member, divorce, or job loss may necessitate a sale.
You have reached the age of retirement and no longer want or need the responsibility of managing your property. This may also entail a move to a more favorable climate which could make management difficult.
As you can see from the previous chart, property values have increased substantially since the financial crisis of 2008. From the following chart, it appears that new home prices are continuing to rise.
Let’s take a look at the current history of building permits in the USA. The most recent data shows there was a drop in July of this year but it seems to have picked up again in July. The data does not show a clear trend line at this point.
Some would argue that now is a good time to lock in profits, while others argue that with continued low interest rates, and perhaps even negative interest rates, that price appreciation has not yet peaked. However, if your personal considerations warrant a sale and you have experienced a significant appreciation in your property value, this may be a good time to sell.
In a previous post, I discussed return on investment, specifically, the NET return on investment. Needless to say, any capital gain that is realized on the sale of a property is subject to tax.
The amount of tax payable is subject to the length of time the property has been held, the amount of depreciation that has been taken (which will determine recapture), and improvements that you might have made.
For more information on how to calculate the tax that you will owe and your net return on investment, I invite you to read that post here.
Given your circumstances, it is possible that you may owe more tax than the capital gain you may realize, especially if you acquired the property through a 1031 exchange. As such, it is important to make the calculations prior to making the decision to sell.
This is by far the most important consideration. As I discussed in my post The Top 8 Mistakes, many investors invest in real estate without a clear strategy as to their investment goals.
Assuming for a moment that your investment strategy was to realize an annual rate of return of 10%. You have achieved that goal but now the question is, what is the probability of realizing that return in the future?
If you believe that market conditions are about to change and that return can no longer be realized, it might be a good idea to sell and reinvest your capital in another property where you can continue to realize that rate of return, or perhaps invest in another type of investment.
The biggest mistake that you can make is to sell your property and have no reinvestment strategy. Cash in the bank is certainly not a good strategy in this environment of bank instability and low interest rates. If you are unsure of a path forward, it might be a good idea to discuss options with a financial adviser or financial planner.
To sell or to hold are necessarily the only alternatives. Depending on your circumstances, there are several other strategies you might want to consider.
Rent With Option To Buy
If you own a condominium or a single-family residence, you might consider approaching your tenant and offering a lease contract with an option to purchase. The tenant would pay a higher rate of rent, and the difference would be applied to the down payment should he choose to exercise his option.
The tenant would also be responsible for maintaining the premises during the rental period. In the event that the tenant declines to exercise his option for whatever reason and decides to move, the additional rent paid would not be refundable. The tenant is much more likely to take good care of the property if he knows he might own it one day and alleviates you of the maintenance headaches.
If the taxes payable from the sale of your property are onerous, you might want to consider a 1031 exchange. Much has been written about 1031 exchanges so I will not repeat it here. If you wish more information on 1031 exchanges and how they work, you can read an article from CWS Capital here, or if you wish, you can watch the following video.
Sell or Hold?
Selling your real estate investments comes down to personal circumstances, and what your overall investment strategy. If your goal is to realize short term gains, then it may be wise to sell. However, if your strategy is to realize annual returns of a fixed rate, and you have followed the steps outlined in my post Managing Risk, it may be preferable to hold until the market data shows a definite change in direction.
This information is provided for educational purposes only and is not to be construed as professional advice. Please consult with a real estate attorney for any legal questions, or a tax accountant for any tax-related issues that you might have. Every situation is unique and may require specialized advice.