How Do You Determine When to Divest From a Property?
RealEstateAdvice.net
How Do You Determine When to Divest From a Property?
Real Estate Investors and CEOs alike face the critical decision of when to divest from a property. From comparing cash flow to monthly costs to assessing ROI against market conditions, we've compiled the top four strategies to guide you through this complex decision. Here's what the seasoned professionals have to say.
- Compare Cash Flow to Monthly Costs
- Evaluate Current Market Rebuy Interest
- Analyze Market Trends and Long-Term Goals
- Assess ROI Against Current Market Conditions
Compare Cash Flow to Monthly Costs
My number one metric for determining if it is the right time to divest from a property is if the cash flow is not enough to cover a property's monthly costs.
For example, I have a duplex that has been doing very well for the past six years. Then, with the upcoming tax increase, the cash flow numbers will drop into the negative. I have looked at other options to maintain the property, but after running the numbers and assessing my other options, I will choose to sell the property and utilize that cash in other investment projects.
At the end of the day, I need the assets I own to increase my wealth. Per Warren Buffett, rule number one is to not lose money!
Evaluate Current Market Rebuy Interest
A key question I ask myself to determine when it's time to divest from a property is: 'If I didn't already own this property, would I buy it today given the current market conditions?' Here's a more specific approach: imagine you wake up tomorrow with an extra $120,000 in the bank because you no longer own your condo. Would you use that money to buy the same condo, even if it meant taking out an $85,000 mortgage? If your answer is yes, then holding on to the property might be the right choice. If your answer is no, then it's probably time to sell.
Additionally, consider whether there are other opportunities that could generate a higher return with the $120,000. Ask yourself if you can invest that money elsewhere to yield more than your current rental income, or if the funds could be used to reduce other debts, start new ventures, or diversify your investment portfolio. If so, divesting from the property could be a smarter financial move. This approach helps you think objectively about your investment and evaluate it based on current circumstances and broader financial goals.
Analyze Market Trends and Long-Term Goals
As a real estate investor, I determine when it's time to divest from a property by analyzing factors such as market trends, property performance, and long-term investment goals. For instance, if a property's maintenance costs start to exceed its rental income, or if the neighborhood shows signs of declining value, it might be time to consider selling. A case could be when a once-thriving area begins to experience economic downturns or a decrease in job opportunities, suggesting that property values may stagnate or decline, indicating a good time to divest.
Assess ROI Against Current Market Conditions
One crucial factor in deciding to divest from a property is assessing its return on investment (ROI) relative to current market conditions. By conducting a thorough analysis of the property's cash flow, appreciation potential, and overall profitability, investors can determine whether it aligns with their investment objectives. If the property no longer offers attractive returns compared to alternative ones, or if market conditions indicate diminishing prospects, divesting is the right option.
