How Does The Real Estate Investor Know When It’s Time To Make The Next Move?
Posted @ 11:07 pm - Filed under 1031 Exchanges, Purposeful Planning, Retirement, Real Estate Markets, Investment Lessons, Capital Growth, Tax Shelter, RE Investment Practice
Wanna know when clients ask that question the most? After their most recent round of purchases/exchange has closed, and before they’ve had a chance to take a breather from the process. The ink isn’t dry on their new deeds, and they wanna know when they’re supposed to get rid of them. And they’re serious as a heart attack. It’s gotten to the point where I just make fun of them immediately.
Still, their question addresses one of the most important quandaries a real estate investor faces — when is the right time to move capital/equity from where you are to some place and/or situation you judge better?
I dunno, let me ask the Guardian Angel in charge of real estate. Or better yet, I’ll consult that black ball we had as kids. You know the one — Answer Ball. Come on, you either had one or knew a kid who did.
It is for sure, a crucial decision real estate investors make. When to sell/exchange?
The Answer
The short answer — The market tells me when it’s time for a particular client to make a move.
The investor’s current situation must be considered along with what the market is saying. As the bumper sticker attests, Life Happens (loose paraphrase). Job changes/losses, kids starting college, new financial obligations, and so much more can careen onto the scene, changing what the best move might be — or that the best move is no move.
I’ve had clients acquire properties, and during the holding period double their income, and move half a continent away. That kind sorta changes things. Their menu just got bigger. What I’d advise them to do just changed also. Flexibility remains one of the critical factors for investors. The inability to adjust on the run can have dire consequences, as less options are rarely a good thing. Duh.
So, what might the market tell an investor that might make them move off the dime?
Let’s not complicate this, alright? Boiled down to it’s simplest form, none of this is rocket science. Of course, everything is relatively easy if you know what yer doin’, right? (Captain Obvious snickering in shadows.)
If your equity has increased to the point where a tax deferred exchange or sale will result in significant improvement over the status quo — make the move.
It’s gotta be as sure as checkmate.
The equity to value ratio triggering a move will vary from client to client and from market to market. Remember, in an exchange it’s not just the market your properties are in, but the market to which your going. These days that could be another state, not just across town. Our clients often own properties in multiple states and on both sides of the Mississippi. When I conclude it’s time for ‘John’ to make a move, it’s because his net equity after sale will improve his position by at least two to one. The rule is, if it’s a marginal call, don’t do anything. If it’s a so-so move, my experience shows I’m the only one who ends up with a significantly improved net worth.
Our policy at Brown and Brown is to advise against any move when analysis clearly shows the benefits to the client would be marginal at best. This seems obvious, but you’d be surprised at what investors think is the correct timing. Again, if an exchange is in order, and it’s likely more than one market will be in play, all markets must be thrown into the mix before we get too froggy.
Exchanges are serious business.
Tax shelter should be improved a great deal — however shelter rarely acts as the instigator for an exchange. It’s difficult to give a range here, because the various factors dictating the increase in tax shelter can differ greatly from investor to investor, and sometimes property to property. But if the investor’s capital growth rate isn’t greatly improved — there’s no justification for the exchange.
Let’s Review
Look backwards in time as if you’ve made the proposed move. If you’re smiling from ear to ear, make the move. If you’re confused as to why you’re bothering, stay put. There’s endless before and after cash flow analysis behind the scenes, but the smile test is nearly infallible in my experience. I’ve done hundreds of exchanges over the years, and there’s no excuse for entering into one lightly or for marginally positive results. We look for the following when deciding whether or not a client should be making a move.
Proof of significantly increased equity to value ratio A huge increase in the value of the real estate acquired vs real estate exchanged The move meshes seamlessly with their Purposeful Plan — No exceptions Their capital growth rate is turbo charged — big time and obviously — turbo charged Tax shelter is improved significantly — not a huge factor, but important nonetheless
The foundational constant when deciding to make a move inside your Purposeful Plan is letting the market tell you when it’s the right time to make any moves. If you hear the market speaking to you, project the results of a mock exchange and examine them with a fine tooth comb. If they don’t meet every parameter mentioned above — stay put.
What does all this really mean, bottom line? The time to make a move is usually obvious. If it’s a no-brainer, you should cover your ears, ‘cuz the market is screamin’ at you to make the dang move already. Anything short of that, and staying put becomes just as obvious.
When all is said and done, you’re still much better off to have a pro tell you if the market, combined with your specific circumstances are ’screamin'’ at you to make a move. Let’s chat and find out if you’re being screamed at. You might be surprised at what the market has to tell you. I’m a great interpreter.
Oh, yer a first time investor? Talking with you will make my day.
This entry was posted on Wednesday, June 4th, 2008 at 11:07 pm and is filed under 1031 Exchanges, Purposeful Planning, Retirement, Real Estate Markets, Investment Lessons, Capital Growth, Tax Shelter, RE Investment Practice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.