Today’s market might be slowing, but real estate transactions are still at historic highs when compared to earlier market cycles. This is because there are endless reasons owners decide to sell their real estate. So let’s attempt to take emotion out of the selling process and analyze the best time to sell an investment property.
Let’s first point out some rational assumptions. Assumption one, with any investment, the goal is to grow the original capital. Assumption two, your total annual return is cash flow plus principal pay down plus appreciation. Knowing when to sell in order to receive the best return is crucial. One rule of thumb we use is the return on equity (ROE) formula. The formula is: ROE = total annual return/equity. Equity is how much value is in the property at current market value minus what debt still remains.
Let’s say our rental property’s total annual return is: $18,000 ($1,500/mo in cash flow) + 9,166 (principle paydown)+ $12,277 (2% appreciation)= $39,443. The total equity in this same property is $133,000. Now let the math decide the rest: ROE= $39,443/$133,000= 29.7%.
Could your money be making you more money in a different asset/asset class?
COULD YOUR MONEY BE MAKING MORE MONEY IN A DIFFERENT ASSET?
Every sector has a range of return and what classifies as a good ROE, so ensure you’re comparing similar asset classes A common theme today is too much equity held within the property. So let’s take the same numbers above, but triple the equity, $39,443/$399,000=9.9%. Still a decent return, but nothing close to the return it was previously. One way to access the equity in your property is a cash out refinance. Yet, don’t take this cash out to go on a vacation, take this cash out to reinvest the equity into another cash flowing asset. This is the method we use to continually grow our portfolio and acquire more doors.
