Once you own a property, you have two basic decisions as to what to do with it: Hold on to it or Sell it. I've owned several properties that I have made the decision to sell based on various reasons. Some of my reasons have had to do with good circumstances, some with less fortunate circumstances. In my view, there are four good circumstances under which to sell a building.
4 Good Circumstances When Best to Sell
Good Circumstance to Sell #1 – Improve Portfolio
You find an investment opportunity that yields a higher return on investment. For example, let's say you own an eight-unit building free and clear that produces $40,000 of net operating income per year. Its market value is $400,000. Not a bad situation.
The opportunity comes along to purchase a forty-unit building for $2,000,000 in a more favorable location. Your numerator/denominator analysis indicates that with a $400,000 down payment, your annual return (positive cash and principal reduction) would be $60,000.
This is a 15% return versus a 10% return on the property you currently own. It makes sense to sell and to execute a 1031 tax deferred exchange on the property.
Note: You might ask whether refinancing 80% of the building at 8% interest and then using the refinance proceeds as your down payment would make more sense. This is a valid question. If you have enough equity to raise the down payment, you may not need to sell a property. If you feel that you have a winner and want to keep it, refinancing may be the simple solution.
Nevertheless, if you want a larger portfolio, it will grow more quickly if you sell a building and acquire a larger property. You are using all your equity and trading up to a larger property.
Good Circumstance to Sell #2 – Improve Lifestyle
You decide you no longer want to own a certain type of property but instead and want a different type of real estate investment. One of the reasons I sold a four-unit and a six-unit I owned in Chicago was that direct management was taking up too much of my time. I figured that with larger buildings I could hire staff to operate the properties, while I managed the staff.
The numbers worked out, and those sales proved to be correct decisions. Other owners I know who are in their sixties have sold their residential portfolios and executed IRS1031 tax deferred exchanges into industrial properties, or into purchasing the physical structure that houses a Walgreen's drug store.
These sellers have stayed in the real estate game, but have gotten a personal benefit – more free time – by selling. They lease out the properties, and the tenants operate them. In this situation, you are gaining something based on your personal needs at the time.
Good Circumstance to Sell #3 – Increase Financial Independence
Your portfolio is large enough that you can liquidate it at your leisure, pay whatever taxes are due, and invest the remaining funds in U.S. Treasury Bonds – the safest investment in the world.
The income that will be generated is more than enough to meet your financial needs. Thus, you are in a position where you have secure income every month, and the only work you need to do is open up mail, which contains checks, and deposit the money.
This is the epitome of financial independence.One might argue that when you do this you are reducing your return on investment, and making a sizeable contribution to Uncle Sam.
This is a valid point, but you gain tremendous peace of mind knowing that your overall position is so strong that you never will have to worry about money. I am assuming here that the U.S. government will be around for awhile and that it will be honorable in making its debt payments.
Good Circumstance to Sell #4 – Increase Financial Independence
Someone offers you a very high price for your property. I don't think much further explanation is needed here.