Deciding when to streamline your portfolio
Even in a down market, it’s sometimes a good idea to “thin out the herd” to keep your total portfolio of investment properties operating profitably. If one or more of your properties is running at a negative cash flow, and has been for some time, you may decide it’s a good idea to unload it.
It’s possible that you find you have several investment properties at this point in time, but possibly you need cash for a better investment opportunity – or you need cash simply because of your personal financial situation. So you may decide it’s best to jettison one or more of your worst performing properties.
Why the negative cash flow?
Maybe you projected your investment property would increase in value but you’ve been unable to increase rents. Or you’re not attracting the right tenants, or you’re not able to increase your rent roll enough to break even. Your expenses could also be increasing at a faster clip than what you had originally budgeted, especially if they were for taxes or heating oil, which have been going up exponentially for property owners in recent years.
Other reasons for liquidating
Or, maybe you need the cash right now, or maybe you’ve just run out of patience with being a landlord. (Perhaps you find that you’re just not temperamentally suited for working with tenants. Maybe you simply don’t like the aggravation of emergency phone calls in the middle of the night when the boiler fails.)
Before you put your rental property on the market, it’s important to figure out exactly what went wrong. Perhaps you weren’t attracting the right tenants. Or perhaps you were stuck in an area where there has been a high rate of foreclosures, so home values as well as the overall look and desirability of the area have been declining precipitously around you.
Analyze your data
As you analyze your data to determine which property or properties you need to put on the market to liquidate, keep in mind that it’s still possible to sell in this current market. However, it’s just going to take longer to sell your property. In addition, you want to try to maximize what you can get for your rental property by doing a few things that are under your control, prior to placing your property on the market.
Fill up those vacancies
One of the best things you can do is to make sure you have no vacancies on your property. Vacancies are like a death knell for property sellers. Other property investors will swoop down on you like vultures to take advantage of your situation. For any vacancy they will impute a very tiny rent, as opposed to your finding tenants and renting out all your units, thereby showing actual rent income for the entire property.
Since actual rent is the main basis for the valuation on your property, you must make sure that you can try to get all of your units rented out in your building just prior to selling it. Obviously, you’ll also want to attempt to get the maximum rent roll you can get, prior to putting the house on the market.
Make those repairs
Another big item that’s under your control is repair work to your property. Make sure that you complete all the most important repairs prior to putting the building on the market. Again, savvy investors will swoop down on you like vultures, and will impute a much greater repair cost for any major repairs you have left for them to do. So if you know that you need a new boiler, this would be the time to put it in, and take the financial hit now. It’s ultimately going to save you a lot more than if you don’t do anything and leave it to another property investor to take over your problem.
Likewise, if you have any major plumbing repairs or electrical work that needs fixing, get them done prior to going to market with your investment property. Also, if tenants have been complaining about particular issues with their specific rental units, you should address them immediately before putting your building on the market.
Find a local Realtor
Once you’ve completed all necessary repairs, and you’ve successfully rented out all your units at the highest possible rent you can possibly get for your area, then it is time to finally put your property on the market. I always recommend using a Realtor who knows your area well to do the marketing for you. You’ll want to get as much exposure for your property as possible, and this can only be accomplished by using a Realtor. In addition, Realtors are also able to access many other investors very quickly who will take a look at your property.
Update your income statement
When looking to choose a local Realtor, make sure you give them an updated income statement on the property, with all your income and expenses laid out. Prospective investors are also going to want to look at your return on investment (ROI) that you’re projecting for your property. If you need help, have your accountant prepare the income statement for you.
Keep in mind that showing a negative cash flow on your property does not necessarily mean your property can’t be sold. Other investors will crunch their own numbers, and they may see things you don’t. For example, it’s possible your rents have been too low for too long, and they need to be bumped up – but you’ve been hesitant to do so with good tenants, fearing increased vacancy if you jacked up the rents.
Another investor may evaluate the situation completely differently than you. And they may feel you have an underutilized asset. Also, some investors are visionary, and can see that some small cosmetic work to units will also help to increase the rent roll on your building.
Setting your asking price
The next important thing to do before placing your property on the market is to set your price. Your asking price must be slightly below market value in today’s economic times. Since you’re looking to unload your worst performing property (or properties), there’s no point in trying to hold out for “your price.” Let several Realtors give you their opinions on the current value of your property (also known as Comparable Market Analysis, or CMA).
You should also be doing your own research. Find out what other like properties in your area are selling for. Check and see what they’ve actually sold for, either using your Realtor for help, or through a simple public records search. Then go back and try to average the CMA values you’ve gotten from several real estate brokers, and then come up with a price that’s at least 5 to 10% below market value. That should be your asking price.
With so many homes on the market right now, as well as with so many foreclosures just hitting the market, you must make sure that your price is slightly below market value to help spur interest in your property.
Once you’ve selected a Realtor, make sure they take excellent pictures of your property, and are really drumming up some buzz about it. The broker should be talking to other brokers, running broker open houses and calling all their property investor associates as well. If you’ve priced your property properly, and are about 10% under market value, then you should be able to sell it within 3 to 4 months. This time frame also assumes you’ve made all necessary repairs to your property, as well as your having filled all open vacancies with good tenants.
However if you priced it improperly, have many vacancies, are in a terrible location, and have not fixed up your property, then you’re going to have a very difficult time marketing it. And then you may be waiting years to find a buyer.
Clean out the underperformers
So follow these tips as part of this investment property information series, and get rid of that negative cash flow property now. You’ll then be able to use the funds to help improve your financial situation and/or look for a positive cash flow property to add to your stable of properties.
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