This week I have been conversing with an investor who 10 years ago had bought a newly constructed single-family home in the Tampa market. He managed to buy during the market’s “up” cycle and place a good tenant with cash flow. The cash flow was light, but he was considering a move to the area after he retired sometime in the next eight to 10 years and wanted to stake his claim in the Florida market before the prices rose even higher. Like many, he was also banking on appreciation that the area was known for.
A couple years later (as we all now know) the pendulum did a quick swing in the other direction, and the values declined, whipping away all the equity he had gained—and then some. To make matters worse, it was getting harder and harder to charge rents that could generate a nice cash flow.
Now, 10 years later, he has decided against moving to Florida and is trying to decide whether he should continue to hold this investment or reposition it to the next emerging market. With the economy improving and the rents rising, he is finally positioned to cash-flow. Home values have also risen, and it looks like it is positioned once again to be a good investment that can produce a good ROI.
So, to Hold or Not to Hold
The market in Tampa is still on the increase, which is paramount to sustainability. However, there are other considerations this investor must factor in to his decision to hold or to sell.
- Generally a boom cycle lasts eight to 12 years. The Tampa market is probably in the midst of this boom cycle. He may be able to ride the wave of prosperity for a few more years without much worry.
- The property’s roof, appliances and HVAC system are aging. Holding a property past the point of having to do expensive capital improvements may be counterproductive to your overall ROI. As the investor bought this property 10 years ago, the roof is now 10 years old as well. It has many good years left, but a prospective buyer will require that the age be taken into consideration or he will lose interest in purchasing for retail prices. The AC has been serviced twice per year as recommended, so it still runs well, but it is approaching the end of its useful life. If the investor holds this property, what expenses will he incur in replacing the HVAC and facing devaluation of an aging roof as well as appliances that are also now all 10 years old?
- Repositioning versus holding. If he were to sell and take his profits and reposition to the next market, the investor can use a 1031 tax-deferred exchange and simply continue to gain return on his original investment dollars. Finding a market and a property that will produce a better return for a longer duration of time to sustain his ROI is his number one consideration now. It is all about the numbers.
Crunch the Numbers
Along with all the usual diligence of buying the best property in the best area, crunching the numbers is paramount to making these decisions.
I always say take the emotion out of the decision when investing. Crunch the numbers on liquidation cost versus finding a market where you can buy more property than you currently have with higher returns than you are currently obtaining. That will make the process much easier.
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