Taking the concept of attempting to sell the market out of the equation, how do you understand when selling a house with equity is the best time? I always get this query from even the most savvvy investors. I was just reading papers from the Denver area’s seasoned investor. I understand this investor well, and I regard him highly. He mentioned something that made me think, I don’t understand for sure whether I agree or disagree, but it’s an interesting subject. He stated that in another portion of the nation he has a condo with a little more than $200,000 in equity. He plans to sell this year’s condo and leverage it to Denver, where he lives, in two or three properties. His arguments are the following:
• The asset value of $200,000 is not increasing. In reality, due to inflation, he is losing cash on that equity. It will assist him to achieve his economic objectives much quicker by investing that equity in more properties.
• He doesn’t want to have the trouble of owning government property. Wherever he lives, he intends to invest.
On his second motivation to sell, there is no argument from me. I own properties in several countries and can inform you that my best investment is all within 45 minutes of my office. My out – of-state properties do well when leased, but they are difficult to handle without jumping on an aircraft, even with a property manager. Unfortunately, to get things done, you just need to show up from time to time.
While I agree with the fundamental idea of not holding equity in real estate, it’s his first argument that made me stop and believe. For a few reasons, I think this. First, I agree with him that property equity produces a return of zero percent, and if your goal is to grow financially, by not leveraging, you slow it down. Nobody can have a good argument against it, but many investors want to own free and clear property. A free and clear ownership has one benefit: you can have a greater cash flow, which means fewer properties to achieve the same monthly revenue objective. Owning property without debt is also something very comforting. If things get financially challenging, there won’t be a creditor or lender who can take it from you. Owning debt-free real estate is very secure from that perspective.
With that said, another reason I don’t like a lot of household equity is because you’re becoming a lawsuit target. I’m not an attorney, but I have friends and peers here who agree with me about the danger. Many lawyers for personal injury are charged for what is called a contingent fee. This simply implies that they will be able to win or settle a case and receive their payment. A fee could be 40%-50% of the sum gathered. Knowing this is true, how many lawyers would take a case that appears to have broken the defense? You can’t get well from a dry one. On the flip side, the opposing counsel would first look into your assets if you got in a car accident, even if it was not your fault, and the other party wanted to sue. No asset is more transparent than immovable property. They can see what you own properties and how much debt you have. If there was a slip and fall on the land, even an LLC that owns one house could be at danger. If the asset were leveraged, it would appear at least as if there were not much to be pursued in the manner of resources. Of course, insurance is your first line of defence, but there are many lawsuits that arise from errors that are not covered by insurance. Free and clear characteristics on your back might generate a destination.
So, you can see why I agree with the stance of this investor to sell his estate to purchase more leverage from others. There are a few increases I may not agree with that come to mind on factors.
First, to make that call, we don’t have enough data. If I owned a property and thought about selling it, the first thing I’d think about is what I’d do with the cash and how much it will cost me to get it. In the new investment, the returns would have to be high enough to cover what I was making and pay me for the transfer costs. I might want the yield to be sufficiently big for me to be able to recover all my expenses in 18 to 24 months, and all after that is extra profit over what I got with the old investment. I hear investors mention occasionally that they want their investment to sell a property and money in. Great! But what will you do with the cash? If you don’t have a proceeds reinvestment scheme in place, you’ll end up with a much reduced return than just leaving the cash where it is.
The other argument I’d challenge this investor on is that he might maintain the condo but still cash in on the equity. I love using credit lines on my rentals, so there’s a title lien, so it seems to be burdened, even though I don’t use the cash. It’s also cheaper because only if and when I use the resources, I pay interest. Setting this up in advance enables me to make fast choices and exploit possibilities without maintaining a lot of money in the bank. He might say that if he sells and possibly buys more Denver real estate, he can access more equity, which is true. You’d be restricted to a proportion of the price with a credit line, so you’re restricted to how much you can access it.
It is crucial to note that each scenario will be distinct and will be based on the objectives and needs of the individual investor. There are also many variables involved in this sort of choice, and navigating can be difficult. To assist you make the best economic choice for you, it would be a good idea to have a trusted consultant look over your approach. If you want to bounce an idea off us, please feel free to reach our office. Obviously, we would love to give you a loan on your next project, but if you need a little hand holding, we are also open to help.