Why Sell?

[ZanderRobertson]

Warren Buffet said: "Our favorite holding period is forever."

Imagining we`re very effective in our property management and diligent in our buying decisions, what are the compelling reasons to ever sell?

Here are some potential reasons I can think of:

1) The JV partners want to sell.
2) The building is getting so old it`s causing major problems that regular maintenance can`t take care of.
3) The city`s economic fundamentals are so negative that there`s a massive exodus on the horizon.

So if a) we own ourselves and don`t have to satisfy a JV partner, b) the property still has a long and healthy life remaining, and c) the city is still relatively strong fundamentally with a continued healthy outlook, what are the benefits of selling?

In the case of the building getting so old, why not just change use/redevelop the land (with the help of a qualified and expert team of course)?

Zander

 

[Thomas Beyer]

QUOTE (ZanderRobertson @ Nov 16 2008, 02:29 PM) Warren Buffet said: "Our favorite holding period is forever."
... what are the benefits of selling?
I agree in principle that a long term hold of an income producing hard asset (like real estate or a business) is a proven path to wealth, but here are some reasons to sell

a) get money for "lifestyle" or "life event" say a boat, a vacation condo, a kids university tuition or a new car !
b) deploy cash, after taxes and fees paid to realtors and lawyers, with higher ROI elsewhere with a similar risk !
c) change the risk adjusted return, i.e. get a lower return with lower risk, say buying a government bond @ 2% vs. an apartment building @ 7.5% yield.
d) pay off partners who want out, or for a divorce or other "I want out" reasons of business or life participants
e) have higher liquidity, i.e. cash or a stock is more liquid than a business or a piece of real estate
f) someone dies, and heirs or estate want cash as opposed to shares of a business

 

[gwasser]

Selling a profitable investment is worthwhile when it is severely overvalued. Of course it triggers taxes, but if you can get the total return you were looking for in year 2 rather than in the planned year 10, then it is certainly worth considering selling.

In real estate, if the market value increased so much that your property`s cap rate at market price has decreased from say 6 to 1%. You may decide that it is probable that your building`s current value is likely to fall back significantly and that you may have to wait many years before it regains the current price. Then you should consider cashing in and buying another property at more reasonable metrics or... to wait on the sidelines until a new better opportunity presents itself.

If you decide to follow this route do consider the tax impact of the sale. The taxes triggered by the sale, basically an interest free loan to you from the government, could be substantial. Market timing is not feasible for most if not all investors, however, Warren Buffett is also known to have said that nobody has ever lost money by taking a profit.

 

[ZanderRobertson]

So selling is a good idea when it can help us pick up speed in our investing by exchanging less performing assets for cash and then buying higher performing assets. Buffett did this on some of his early purchases by picking well, buying well below market, then selling high and taking cash to re-invest at another great bargain.

but assuming cash flow is strong isn`t it just as valuable to hold and use the cash to re-invest? perhaps not.

On the other hand selling can help a more established investor reduce risk and therefore headaches by allowing them to exchange higher yielding assets for cash and then re-investing in low risk options.

Again, if market fundamentals are strong and management is strong (and hands off!), isn`t the risk negligible? especially if we`ve already used 10-20 years of momentum to get into a strong leverage position 0-50%

good points. thanks

 

[Jack]

You sell because cash is king! In theory, you could get a higher ROI if you invest it in X, you might need to take advantage of a capital loss carryforward before it expires, but - most importantly - there`s nothing with less risk than cash! Cash is, was, and always will be, king. That`s why it`ll always make sense on some level to sell.

Look at Warren Buffet. Do you think he had nothing to gain by writing that letter to the New York Times about a month ago? He buys major companies that are often on major indices. And who buys the indices? Mutual funds, pension funds, etc. He has lost a boatload this year, and while it might not affect him personally, he still has shareholders that he needs to answer to. To think that he wrote that letter for no other purpose than to allow the public to breathe a collective sigh of relief is very naive.

 

[ZanderRobertson]

It might be low risk, but it's very low reward too. would you consider inflationary erosion a risk to holding cash? I would, whereas a hard asset that produces cash and raises in value along with inflation seems a safer haven than cash. didn't buffett say 'cash is king only if it's being put to use". A good example of this is him buying this year during the "financial meltdown".



I agree it was beneficial for him to write the op-ed for the NYT, just as he leveraged his esteemed position to bargain with Goldman and GE. He (and anyone holding RE in Calgary/Edmonton over the past year) have lost boatloads in terms of valuation, but does that matter if you're not selling and your assets are spinning cash (even in a down market)?



The valuable thing to me seems to be owning all (a piece of RE) or part ( a share) of a business that produces cash and has a strong ability to produce cash in the future. I'd say cash flow is king, and cash itself is valuable insofar as it helps produce cash flow.



thank for the thought provocation






QUOTE (Jack @ Nov 16 2008, 06:00 PM)
You sell because cash is king! In theory, you could get a higher ROI if you invest it in X, you might need to take advantage of a capital loss carryforward before it expires, but - most importantly - there's nothing with less risk than cash! Cash is, was, and always will be, king. That's why it'll always make sense on some level to sell.



Look at Warren Buffet. Do you think he had nothing to gain by writing that letter to the New York Times about a month ago? He buys major companies that are often on major indices. And who buys the indices? Mutual funds, pension funds, etc. He has lost a boatload this year, and while it might not affect him personally, he still has shareholders that he needs to answer to. To think that he wrote that letter for no other purpose than to allow the public to breathe a collective sigh of relief is very naive.

 

[Jack]

QUOTE I would, whereas a hard asset that produces cash and raises in value along with inflation seems a safer haven than cash.

But where are the guarantees that real estate always produces cash and always raises in value along with inflation? Inflation in Alberta this year has risen a lot more than property values, that`s for sure!

I guess a better way to put it than "less risk" is that cash gives you options. Real estate is only worth what someone will pay you for it. You`ve gotta feel for those who chose not to sell in 2007 because "the market will just keep going up, up, and up", and who knows what they`ve sacrificed as a result. Personally, in one of my more dumb moves, I bought a place in Calgary in January of 2007, pretty much when the market was at its peak "seller" status. Now, I might have to wait until about 2012 before the place is actually worth what I paid for it! That`s a bad investment.

 

[Thomas Beyer]

QUOTE (ZanderRobertson @ Nov 16 2008, 05:55 PM) So selling is a good idea when it can help us pick up speed in our investing by exchanging less performing assets for cash and then buying higher performing assets. ...

On the other hand selling can help a more established investor reduce risk and therefore headaches by allowing them to exchange higher yielding assets for cash and then re-investing in low risk options.

Again, if market fundamentals are strong and management is strong (and hands off!), isn`t the risk negligible? ...

ANY investment has risk .. yes even a low risk Canadian savings bond could be worthless .. so risk is a key issue for selling, as is TIME invested (say a business is more time consuming than a piece of real estate than owing a stock ..) as is risk-adjusted ROI .. so if your asset/business is in high demand you could sell it for more than that same business with same cash-flow in a low demand point in the cycle .. case in point woudl be Alberta real estate with similar rents today than in 2007 .. but lower prices / lower demand (or higher cost to buy i.e. mortgage costs and/or mortgage money availability)

Asset performance is a function of risk, to a degree .. buying a high tech stock could be more rewarding but has higher risk than buying a low tech stock like Microsoft or a bank ..

 

[ZanderRobertson]

Sorry that was not well stated, I certainly don`t mean that the value of a piece of RE will always rise. Absolutely, values will rise and fall, rise and fall etc., but one thing is for certain, none of the lost value is due to inflation since the asset is valued in dollars.

As for a guarantee that RE will produce cash, it can`t be guaranteed, but when times are tough, you can bet that a roof over people`s head is one of the last things they will give up. So it`s fairly low risk in that way too, assuming the owner is in a wise position regarding leverage and the property is managed right.



QUOTE (Jack @ Nov 16 2008, 06:52 PM) But where are the guarantees that real estate always produces cash and always raises in value along with inflation? Inflation in Alberta this year has risen a lot more than property values, that`s for sure!

I guess a better way to put it than "less risk" is that cash gives you options. Real estate is only worth what someone will pay you for it. You`ve gotta feel for those who chose not to sell in 2007 because "the market will just keep going up, up, and up", and who knows what they`ve sacrificed as a result. Personally, in one of my more dumb moves, I bought a place in Calgary in January of 2007, pretty much when the market was at its peak "seller" status. Now, I might have to wait until about 2012 before the place is actually worth what I paid for it! That`s a bad investment.

 

[rymac]

Easy, you sell to accelerate gains. e.g. property worth $120,000 provides $12,000/year of income. So a 10%/year return on your money. The property appreciates to $240,000 but its income remains unchanged. So your return on capital has now decreased to 5%/year. So you sell and reinvest in an asset which provides you a better rate of return. Also, by selling this property you have $120,000 today instead of 10 years from today. 10 years of without repairs, evictions, and check depositing.

 

[MonteDobson]

QUOTE (rymac @ Nov 16 2008, 10:30 PM) Easy, you sell to accelerate gains. e.g. property worth $120,000 provides $12,000/year of income. So a 10%/year return on your money. The property appreciates to $240,000 but its income remains unchanged. So your return on capital has now decreased to 5%/year. So you sell and reinvest in an asset which provides you a better rate of return. Also, by selling this property you have $120,000 today instead of 10 years from today. 10 years of without repairs, evictions, and check depositing.

True, but why sell when you can re-finance and pull out your money (tax free) to re-invest in another property. This further accelerates your ROI based on the initial capital invested. If you just keep selling and buying another property (or investment), transaction fees and taxes will eat up all of the potential ROI.

 

[manojsingh]

I agree with Monte that refinacing is better option so why sell?

 

[invst4profit]

By age 65 I will have all the money I will likely ever need so what would be my reasoning to continue working at running a business.
It really does not matter If you have property managers or other assistance at some point in time the majority of business owners decide they finally want to retire completely and coast to the end. The nice thing about this business is that it is extremely simple to sell compared to most businesses.

I also want to ensure that I transfer all of my wealth to my children before I die to eliminate the taxes and I have found through first hand experience it is far simpler with cash.

 

[manojsingh]

But if your properties are in company name you just transfer the shares of the compnay. You do not have to sell to transfer your properties to your kids.

 

[invst4profit]

No company. Personally owned.


What I own now was purchased with the intention of being long term temporary (10-15 yrs).If I can get the rent`s up faster I will sell sooner. My goal is to double the value of the property then sell.

At the time of sale I will offer it to the kids but I have no idea where there lives will be in 10 years.

 

[Thomas Beyer]

QUOTE (manojsingh @ Nov 17 2008, 08:15 AM)
But if your properties are in company name you just transfer the shares of the compnay. You do not have to sell to transfer your properties to your kids.


Isn't selling / transferring shares a taxable event too ?

 

[manojsingh]

I fully agree with Thomas. We have to find a way to minimise the tax.

 

[MikeMcCrae]

If you follow the fundamentals the price of the property doesn`t matter on the short term. If you buy a house for $300,000 and it cash flows well, why care if it drops to 280,000 or even 270,000 if you are not selling. When the price escalates to 330,000 or so, again what difference does it make? The only time it matters is when you are selling, and if you bought on the right fundamental with strong cash flow you could actually sell the house for less than you paid and still have profit. Yes there are risks in the real estate game but compared to any thing else I have found they are quite a bit less. Certainly better than holding large amounts of cash. The lost opportunity of cash is just way to expensive for my risk tolerance.

It breaks my heart to sell a good property, (not because of emotion but once sold you have lost the asset for good) but sometimes it is needed to average costs up (for taxation) and sometimes it is needed to make funds available for other reasons as mentioned by other posters.

 

[mortgageman]

You might consider selling rather than refinancing if the equity still tied up in the property post refi was greater than your proceeds after taxes and other costs. Refinancing and still having a large number of dollars tied up is still a drag on your potential return. On the other hand, you would be less leveraged so somewhat lower risk.
With regards to cash being king, I think you might want to consider modifying the statement to "having easy access to inexpensive cash is king." You can make decisions quickly if a excellent opportunity presents itself and it only costs you if you use it. This is why HELOCs are so powerful. Undeployed cash is a poor position to take except on a short-term basis because erosion due to inflation is pretty much a certainty.
By the way, in my opinion Canada Savings Bonds - which are paying 2.35 to 2.65 percent according to the CSB website - are as risky as it gets from a return on investment point of view. While it`s unlikely the government would default, you are virtually guaranteed to lose money after inflation and taxes. You may as well make your mattress warmer and line it with $20 bills - then you can turn the furnace down a little more at night and be further ahead.

 

[ZanderRobertson]

My sentiment exactly. I understand what others are saying about using the cash generated from a sale to accelerate, but it seems like after tax and the hassle of offloading the asset, what`s the guarantee that we`ll find a new asset that performs as well as our strongly cashflowing current asset?

A bird in the hand is better than two in the bush?


QUOTE (MikeMcCrae @ Nov 17 2008, 09:42 AM) If you follow the fundamentals the price of the property doesn`t matter on the short term. If you buy a house for $300,000 and it cash flows well, why care if it drops to 280,000 or even 270,000 if you are not selling. When the price escalates to 330,000 or so, again what difference does it make? The only time it matters is when you are selling, and if you bought on the right fundamental with strong cash flow you could actually sell the house for less than you paid and still have profit. Yes there are risks in the real estate game but compared to any thing else I have found they are quite a bit less. Certainly better than holding large amounts of cash. The lost opportunity of cash is just way to expensive for my risk tolerance.

It breaks my heart to sell a good property, (not because of emotion but once sold you have lost the asset for good) but sometimes it is needed to average costs up (for taxation) and sometimes it is needed to make funds available for other reasons as mentioned by other posters.