Never cash out your money-maker unless it’s an emergency
With residential rental property, always stick to your long-range goals of steady yearly cash flow growth, combined with the tax advantages of depreciation and holding your investment property asset, as well as capital market appreciation in the long term. The only time you should be cashing out should be reserved for emergencies.
Recent data from the National Association of Realtors (NAR) suggests property investors are intending to hold onto their rental property for at least eight years now (up from five years the prior year). However, some are finding the strong demand for properties coupled with a decreasing inventory of foreclosures and investment properties in general, as well as continued low mortgage interest rates to be too irresistible. And so they are placing their cash cows on the market now. Again – big mistake if you’re not in an emergency situation, and must have the cash on hand quickly.
Since real estate investments peaked in 2011, there was a dropping off of property investing last year as inventories declined, and foreclosures available to the marketplace lessened. With decreased inventory and market valuations rebounding, many investors decided to begin cashing out. As noted in my prior articles, only negative-cash flow rental property (or, the “dogs of war”) should be jettisoned when consistently non-performing, or when you are unable to make positive cash flows when still renting out at full capacity and at top market rents. Positive cash flow properties should remain within your stable of properties for increased leverage to acquire additional property, as well as future cash growth and appreciation.
As foreclosures have dwindled in the past year or two, so too are property investors that originally came into the marketplace by swooping in and purchasing large numbers of foreclosures, fixed them up, then rented them out for positive cash flows. As prices have been on the increase of late, and with fewer foreclosures readily available in the marketplace, investors (especially institutional hedge fund type investors) have cut back on their rental property investment.
Higher entry costs into the market
In addition, with the rebound in the entire housing market over the last year, prices to get into the rental property acquisition market concurrently have risen. For example, according to the NAR, the median investment property price rose 15% from 2011 to 2012 – from a median price of $100,000 up to $115,000. Significant to note is that while the median down payment on all investment properties remained the same, at 27% of property price, the percentage of buyers who paid all cash for their investments rose to almost 50%.
The combination of increasing prices and tight credit have also produced a scenario where investors are lessening their current buying schemes for investment rental property. However, the NAR data also shows that 47 % of real estate investors intend to purchase another property at some point within the next two years. Though with current tight credit standards in the mortgage industry, roughly half of all investors will continue to make all-cash buys.
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