With interest rates rising and two major Canadian real estate markets, Vancouver and Toronto showing signs that they may have peaked for this real estate cycle, the topic of “Is this the time to sell” or “When is the right time to sell my investment property” has recently come up several times. It is never a simple answer. As I wrote in my book, Look Before You Leap, But LEAP, this is a complex topic because there are actually three possible scenarios. Depending on what is happening, you could potentially sell, hold, or buy more properties.
What is a Net Investor?
There are many successful investors that say never sell, always be a net investor. They go on to say refinance your property and buy more with the equity you have gained to build your wealth. That is a great idea, but life doesn’t always support that notion. Things happen beyond our control and properties don’t always perform as expected for a multitude of reasons. A wise investor should always have multiple exits in mind prior to investing in a property, consider various potential outcomes and make choices to support your desired outcomes.
When answering the question “When is the smartest time to sell your investment property”, there is an obvious time to sell, which is not when you are forced to, but when your desired exit is in alignment with a strong market demand and property values are high. I have been experiencing this in the Greater Vancouver residential market and several investment real estate markets across Canada for the last 20 months.
It is also critical that you have the right team of professionals around you, especially when considering refinancing for further investment. This is where I direct you to Keaton at Kirkwood & Brennan Mortgage Group. He is able to provide another perspective and help minimize risks while maximizing cashflow and return.
Selling Your Property at the Right Time
Sometimes the stars align like back in 2006 in Calgary, when I sold an investment condo because I wanted to redeploy my profits and I had some potential concerns regarding the overall condo complex. The Calgary house prices were peaking for that cycle. I looked at what was happening in Calgary market and determined that the property values were unprecedented, demand was extremely strong. I felt it was time to take the profits off the table. Could I have refinanced and taken the equity out? Yes, but I also had some doubts and felt it was best to exit then.
However, sometimes the stars don’t always align perfectly. Some, but not all of my clients’ or my property exits have been as lucrative, which why I wanted to share some thoughts on the subject.
Sometime investors buy an investment property and everything looks good on paper and then unexpected things happen that we just can’t predict in our due diligence. I have been there myself. I have sold before I wanted to, but it is better to stop the bleeding and cut the losses before they become a bigger issue!
Thresholds for Cash Flow and Increasing Values
When buying investment properties, whether your strategy is a buy and hold or a BRRRR (buy, renovate, refinance, rent, & repeat) most investors’ objectives are to gain a profit through increased values from the purchase price and/or some form of rental income stream.
It is great to target the property value increases, but if the property can’t financially support itself then that could be a challenge. In that case, you need to ask how long are you willing, or can financially support the property before the property becomes problematic for you? In short, Appreciation (forced or market) = Wealth Creation, but Cash Flow = Sustainability, and you need sustainability to ride through the rough spots to create your wealth.
If there is a cash flow issue, ask yourself is it temporary, or potentially chronic. Are there valid reasons to be optimistic about the property’s future? This really hits at the heart of the decision making for whether to sell, hold, or buy more (assuming that there is a valid reason to buy more in the same area).
Essential Considerations for Selling Your Investment Property
Here are some key investment property considerations when making a sell, hold, or buy more decision:
- What are the property specific influencers to investigate that can affect your property’s cash flow?
- If you are using property rental management, how is that working for you?
- Is your property insurance significantly increasing and expected to continue?
- Are the utility rates significantly increasing and expected to continue?
- Are your repair and maintenance and operating expenses a reasonable ratio of the rental income or is the ratio becoming too high?
- If your investment property is a condo, is the condo reserve fund contribution significantly increasing, or should be increasing in the near future?
- With mortgage interest rates increasing, do some calculations to determine at what mortgage rate your cash flow turns negative.
- What are the steps, if any, can you take to improve the performance and value of your property?
There are some key market related considerations when making a sell, hold, or buy more decision.
- What is the economic climate of the area? Is it improving or deteriorating?
- Is the neighbourhood changing for the better or worse?
- Are there more properties being built in the area?
- How does or will your property compete in the future?
- How are the rental regulations affecting your ability to raise rent now and in the foreseeable future?
Are there a combination of forces that are simultaneously happening that will prevent your investment property to properly cash flow, such as increasing mortgage interest rates, increasing expenses, and rent controls that will prevent you from raising rents to financially keep up?
Take Action on Your Investment Property
I have seen investors sell too early because they saw negative cash flow or a drop in value, didn’t see any improvement in the market in the short term, and didn’t do any sort of analysis of the situation to determine if it was temporary or chronic. For any investor, it is always prudent to annually review your real estate portfolio and do some cash flow projections based upon the data you already have and reviewing it in light of the above presented material.
If you would like a free review of your real estate portfolio with all of the above considerations in mind, please feel free to email me at [email protected]. I am happy to discuss your real estate portfolio with you.