“Should I sell or hold my real estate?” I get asked that question every week. Unfortunately, there is no “one size fits all” answer to this question. There are many factors to consider when thinking about selling or refinancing a real estate asset or portfolio.
- Inflation. Real estate (generally) appreciates over time whereas cash diminishes in its purchasing power (inflation). If you sell a real estate asset you need to consider that your money will be functionally lessened by the rate of inflation each year.
- Higher and better use. Do you have a higher and better use for the cash? I don’t mean that you may find a better deal one day. I mean right now. If you are going to sell and then quickly move the money into a new deal (1031 exchange, etc.) producing a higher rate of return than the old deal, do it. If not, you may want to consider the hold time while you figure out how to buy a new deal. I see this most often with people who have a few rental houses and want to cash them in so that they could by an apartment deal…someday.
- Don’t sell until you have a good understanding of what you want to buy. This is especially true if you are switching to a new asset class such as single family residential to multifamily. Spend at least 6 months studying the business and current market conditions before you sell or refinance the original assets.
- Know your numbers. What is your current cash flow or cash on cash return? What is your current IRR? Have you thought about tax implications of owning or selling a deal? What is the new cash on cash and IRR of the new deal? It should be much higher than the assets being sold or refinanced.
- Loan restrictions. Do you have any loan restrictions that will cost you if you dispose of an asset? Most commonly this will be in the form of a prepayment penalty such as defeasance or a yield maintenance structure. A prepayment penalty can seriously reduce the profit of a deal or refi.
- Understand DSCR. If you are selling a house, this does not apply really but if you are selling a multifamily or commercial asset… it really does! Debt service coverage ratio (DSCR) is a ratio that most lenders use to rate the financial health of a deal. If you want to know how your deal stacks up, just calculate the DSCR using your sale/refinance price and a 1.25% DSCR using the current interest rates applicable for that type of loan.
Conclusion- keep your real estate unless you have a much better use for the cash.
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