Is it time to purge your Buy and Hold property?
The past decade has been a prime market for buy and hold investors. Those who were astute enough, and had the wherewithal, to invest over the past 10 years have enjoyed a great deal of cash flow and some great appreciation. Investors have been able to enjoy the comfort in knowing their investments have gained a substantial increase while they rode the economic wave of prosperity.
Many Investors who positioned themselves in the correct markets saw their property value double in value. While many of these investments are in strong seller’s markets and inventory is so tight many investors are wandering if perhaps it is time to sell for top dollar and re-position their investments into the next emerging market. This is a great question, so let’s take a look:
When do you sell?
The purposeful Buy and Hold investor knows that the properly executed exit strategy is paramount to capitalizing on the investment. As a purposeful investor, you will want to hold your investment as long as it makes sense to hold. As long as property values climb and the local market is strong it makes sense to hold.
You will want to watch market conditions so you can sell at a time when it is best positioned to give the highest returns. You bought during a buyer’s market and you will best be suited to reposition during the peak of the seller’s market. (Because we all know that following a Sellers market is a declining Buyers’ market). This market swing can happen without notice, so keeping track of the local markets when your property is performing well for an extended period of time is important and all too often overlooked.
Watching for signs that you may want to reposition your assets to a new market
· Time on market: when the average time on the market for listed real estate for sale hits 30 days or less, suggests a peak sellers’ market
· Building activity has reached a peak: an often overlooked piece of diligence is what the building permit activity is doing, builders spend a lot of money to research market swings…keep an eye on what builders are doing, as they reduce their exposure you can bet their diligence suggests a market swing
· Jobs slowing: jobs may still be plentiful but showing signs of a slowdown
· Population growth: rate of population growth is slowing down
There are a number of things you can watch for to determine when it is the optimal time to sell. Many of these things require deeper diligence and an eagle eye on the economy.
Looking deep to forecast where the market is heading is the edge that the seasoned investor holds. The expression “everything they touch turns to gold” is derived from these people understanding the telltale signs and acting accordingly.
Considering exit strategy, everyone knows you should “buy low and sell high” yet most people do the opposite. Most people follow what the masses are doing. Of course the masses tend to get caught up in the hype and often wind up buying when the markets are overheated. “Please avoid doing this”
During the peak of a seller’s market everyone tends to get caught up in bidding wars and therefore prices rise beyond values. The non-seasoned investors are fearful that they may lose out so they jump in at the worse possible time. They have watched many investors buy and make it big and by the time they start buying it may already be the time to be selling.
Often they will find themselves in a bidding war as they hurry to get in on the action. If you are in a bidding war to purchase, you are obviously not in a market you should be buying and usually it is the new investors bidding during this time. Never get caught up in a bidding war.
The seasoned investor knows that what follows a seller’s market is a decline swinging downward toward a buyer’s market. This is the time to sell your current investment property and reposition to the next emerging market.
The 1031 exchange
The 1031 tax deferred exchange has been a valuable tool for investors used for many years. As of lately this has been put to great use again as investors are repositioning their assets.
A Buy and Hold strategy is the best way to amass a fortune in real estate. The late Roy Rogers said “Don’t wait to buy real estate, Buy real estate and wait” What he was saying is go buy real estate and wait for values to rise. Once it rises you want to reposition to the next market and ride that markets economic wave of prosperity. This does not mean you need to hold one property for many years. You want to hold a property for a number of years until market conditions suggest to sell and reposition to the next emerging market.
Happy investing!
The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal service or professional tax service. As with any investment, there is an inherent risk in investing in real estate.