There are plenty of good reasons to sell a home. There are also plenty of bad ones. The one I see the most is investors selling good investment properties after only holding them for a year or two. In my new book "Along for the Ride", I call it playing small. You're only in the first inning of a nine inning game. Why not keep the property rented and wait for the BIG payday in 20 or 25 years?
Here is a short excerpt from Chapter 3 where I talk about avoiding the temptation of playing small:
Leverage means being able to do things with your money that would normally be impossible. Real estate gives you ample opportunities for leverage. Chapter One demonstrated this with the example of buying a condo. We saw that you could pay 5% of a condo’s total price in order to fully control it. That means you could make a downpayment of just $25,000 to acquire a $500,000 condo. If this example doesn’t leave you feeling excited about leverage, here’s another. Suppose that the price of the $500,000 condo increases to $550,000. It’s not a stretch to assume this because nearly all real estate eventually increases in value. With the new $550K price, the condo is now worth $50,000 more than when you bought it. Since you put down $25,000 as your downpayment, you’ve made a 100% return on your investment in the condo.
A 100% ROI? The thought gives people in other fields goosebumps. Look on Wall Street, for instance. Some traders on the Street would give their kidneys for a 100% ROI. And that’s not necessarily a figure of speech. A 100% ROI really is out of reach for those guys. To them, it often seems as elusive as the Loch Ness Monster or Bigfoot.
Good thing we’re not trading stocks. We’re in real estate, a field where a 100% ROI is not only possible, but also inevitable - depending on how many years you hold a property. In our field, a 100% ROI could even come within a year of acquiring a property. Should that happen, don’t sell your property. You may be tempted to sell, since it means - in theory - that you can claim the 100% ROI. Fight the temptation, though. You really don’t want to sell at this point. Trust me. We’re still in the first inning. And there are plenty of innings to go.
Selling is a bad idea because you won’t get the full 100% ROI. It may look like there’s a $50,000 payday waiting for you if you sell. Yet selling entails numerous expenses. Capital gains taxes would be one, if it’s not your principal residence or if you’ve lived in it for less than one year. Others would include realtor selling commissions, and legal fees. After these expenses, your $50K payday could look more like a $35K payday.
But wait, there’s more...
You’ve also taken a huge step backward. By cashing out as soon as your property increases in value, you’re now without any assets. Back to square one. With a little more cash than when you started. Yet no closer to building a framework for long-term financial independence.
Sorry to beat you over the head with this. Especially after we spent Chapter Two covering the need for long-term thinking and an investor mindset. I just want you to be mindful of the temptation that can arise when your first real estate investment begin to bear fruit. That’s always an exciting time. I see it as analogous to growing tomatoes in a backyard garden. At the first blush of red, it’s tempting to pick the tomatoes and eat them. Yet if you can just wait a few weeks, your tomatoes will taste infinitely better. So too with real estate, where a good ROI today can be even sweeter years later.
As a bonus... I’m going to give you another snippet from my book "Along for the Ride" where I talk about the investors mindset you must possess if you want to achieve financial success and wealth.
From Chapter 2 of "Along for the Ride":
My goal in this chapter is to help you overcome one of these internal problems. I believe it’s the largest and most serious of the bunch. The problem to which I’m referring is the “trader’s mentality”.
The trader’s mentality comes from the world of stocks. In that world, people are accustomed to stocks being bought and sold in a short period. Sometimes, that period is a few weeks. At other times, it can be as brief as a few minutes. But it’s almost always short. With some exceptions, the average trader isn’t looking to buy a stock and then sell it in ten years. Traders tend to be focused instead on the here and now. What stocks can be bought and then sold (i.e. “flipped”) in the shortest possible time for the highest possible profit.
You can’t blame them for thinking this way. The trader’s mentality makes perfect sense on Wall Street, where the markets are whizzing around at breakneck speeds. In that kind of climate, short-term thinking can literally pay off.
The problem, though, is that the trader’s mentality is often transplanted into other fields. Fields that are nothing like stock trading.
In my work as a realtor, I see this mistake time and again. People look at properties with the eyes of a stock trader. They don’t understand that a trader’s strategy of quickly buying and selling (“flipping”) stocks won’t work on houses.
The reason is that real estate properties are fundamentally different from stocks. A property like a house is not some invisible thing that a company can arbitrarily issue more of. Instead, the house and nearly any other piece of real estate is physical and limited in quantity. Because of these differences, it’s a far bigger deal to buy and sell real estate than stocks. Property inspections have to be done. Banks have to be notified and then approve financing. Insurance has to be worked out. And all that’s just the tip of the proverbial iceberg. So many items have to be handled in a real estate transaction that the process often takes months.
Buying and selling stocks, by contrast, can be done in a matter of seconds. This means that a trader could sell off his entire portfolio of stocks in a few short minutes. Good luck doing that in real estate. A real estate portfolio, made of multiple properties, would take months or even years to sell off. And it would also be more expensive to sell than the stock portfolio. Transaction costs for selling a stock portfolio might be a few hundred dollars. Compare that to real estate where costs include capital gains taxes, agent commissions, and legal fees. Add those real estate costs up and you’re looking at tens of thousands of dollars.
Given all of these differences, it’s a major mistake to think about real estate using the short-term, trader’s mentality. You’re better off approaching real estate with the investor’s mindset.
When you think like an investor, you focus on the long-term. This is perfect for real estate, since it’s a market that doesn’t go up every year. Stocks don’t go up every year. But neither does real estate or any other market (antique cars, art work, wine, etc.).
Real estate prices do increase, though. It’s just that the increase happens over spans of at least eight to ten years. That time frame favours the investor, since they don’t mind waiting.