By R.W. Bowlin
A common adage in real estate is that “money is made on the buy.” How can we refute this truth? A poor acquisition makes generating positive returns very difficult. However, knowing when to sell is just as crucial and arguably tougher to determine. Throughout the next two articles we will first make the case for selling your property in today’s market, followed by making the case to hold it. Two items to note: first, we are not recommending owners either sell or hold their property, the intent here is to provide food for thought. Second, these articles address purely market conditions and not the owner-specific considerations such as the owner’s age, estate planning circumstances, liquidity needs, and other factors that can impact sell/hold decisions.
Why Now Is the Time to Sell
There are multiple market conditions that make now the optimal time to sell your investment real estate. Awareness of these factors is of the utmost importance when preserving the appreciation owners have experienced throughout the last real estate cycle.
Stalling Rents – Recent CoreLogic data stated rents of single-family homes increased a mere 0.4 percent from February 2017 to February 2018, the smallest single year increase since 2011 and well below the national inflation rate. The trend is not isolated to single-family homes as apartments saw an average quarter-to-quarter decline of $50 within Seattle. Values of rental properties are predominately driven by two factors, rents and supply. In regard to the former, some feel the ceiling has been reached.
Increased Inventory – 2017 was a record setting year on many fronts, including the number of new apartment units entering the market. Throughout the year nearly 10,000 units were constructed, with the number expected to increase in 2018. Vacancy rates have increased significantly over the last year, providing renters more options and negotiating power. Move-in incentives are once again expected by renters who can realize savings if they are willing to move from one building to another.
Interest Rate Risk – With historically low interest rates throughout the last decade, borrowing rates can only go one direction. There is little uncertainty that interest rates will continue to trend up as the Federal Reserve has been very public regarding their intent to increase borrowing rates. While “cap rates” (a metric used to value investment real estate) generally trend with interest rates, the spread between the two is unusually small – presenting the undesirable situation for buyers where property mortgages may create “negative leverage.”
Regulatory Risk – This point almost goes without saying as nearly all property owners have felt the impact of Seattle City Council’s regulatory environment. As it stands today, the regulatory burden shows little sign of easing.
Seasonality of Sales – Most professionals will tell you the summer is the best time to sell rental properties. Days are longer, properties look better bathed in sunlight and single-family buyers are often motivated to purchase a home in advance of the school year.
Owners are often tempted to squeeze out as much appreciation as possible, but they should remember that no one has lost money taking positive returns off the table. Furthermore, a large potential tax liability should not restrict a decision to sell as there are plenty of 1031 exchange options outside the local Seattle market that can serve to both enhance your potential cash flow, reduce your overall risk profile and even eliminate active management. Stay tuned for next month’s article, where we will discuss the case to be made for holding on to your local properties.
Roger W. Bowlin, President of Real Estate Transition Solutions, LLC, provides exit strategy analysis, execution, income and equity replacement options for investment property owners. If you have questions relating to your investment property ownership, please email him at: RWBowlin@RE-Transition.com or call (206) 755-7068.