March 4, 2020

8 of the most common reasons why owners sell investment properties

In this blog post (and the accompanying 4-minute video), I’m going to go over 8 of the most common reasons why owners sell investment properties. Watch the video or read below to see if any of them apply to you!

1.To take a profit
If the property is worth more now than it was when you bought it, then you might just want to sell it now for a profit, before the property’s value declines.  We could be in a rising market.  Or you might that that we’re going to enter a recession in the next year.  Regardless, if you think that you can sell now and be better off than before, or better of than holding onto it, then you’re selling to take a profit.

2.You have a loan coming due.
If you have a loan on your house, there’s a good chance you have a 30-year fixed mortgage, so after paying the loan for 30 years, you own the house free and clear.  Commercial loans are often not structured this way.  They often have a much shorter term, say 10 years, but could still be amortized over 30 years, which means that when the 10 year loan is up, you don’t own the property free and clear.  You need to pay off that loan somehow.  So there are generally two ways to pay off that loan – you could refinance and get a new loan, or you could sell the property.

But there might be some cases where you can’t get another loan on the property.  Say you have a lot of vacancy, and a bank isn’t willing to lend on the property.  Or you’ve had some negative credit event in your life that makes it hard to obtain a new loan.  In these cases, you might be stuck, and your solution would be to sell the property.

3. A major tenant has just renewed. 
When this happens, the value of the property increases, because you have a guaranteed stream of income from this tenant for the duration of the lease.  The value of the property is at its highest, and it may be a good time to sell.

4.A major tenant’s lease is coming due. 
This usually spells bad news for the property owner.  In most cases, with some exceptions, a landlord doesn’t want to see a major tenant’s lease come to an end, especially if the landlord doesn’t know if the tenant is going to exercise an option to stay, sign a new lease, or just leave.  Rather than deal with the uncertainty, some landlords would prefer to sell the property to someone else and let the new owner deal with the problem.  There are many investors who love this type of property, as they can deal with the uncertainty.  If the major tenant stays, they continue to collect rent.  If the tenant leaves, then the investors can re-tenant the property with another business that might pay even more rent than the original tenant.  And in this case, the investor would have increased the property’s value.

5.Diversify your risk. 
If you have too much of your net worth in a particular type of real estate, or too much in real estate in general, it may be a good idea to diversify.  If all you own is retail property, why not branch out into industrial or apartments?  If too much of your money is tied up in real estate, it might be a good idea to sell some and purchase stocks, bonds, or other investment vehicles.

6.Risk outweighs reward.
Many times, an owner can look at a property and see that there’s a lot more that could go wrong, and not much opportunity for things to improve.  This could particularly be true if an owner owns a property with several other investors, and he is the only one who has a personal guarantee on the loan.  It might be better to sell the property and put that money elsewhere.

7.Work outweighs reward. 
Many times, landlords are just sick of dealing with issues.  This is often true of investors who own single family homes or apartments as investments, and don’t want to deal with evictions or plumbing issues.  Sure, your property manager can help with that, but ultimately the problems are the responsibility of the owner.  It might make sense to sell this property and buy something that is less management intensive, such as a strip center or a single tenant retail property, where the tenant is responsible for anything that goes wrong with the property, and the landlord just collects a check.

8. Partnership issues. 
Often, partners are at different places in their lives and recognize the benefits of selling and going their separate ways.  I wrote a detailed blog post about partnership breakups here.

This is not a comprehensive list, but just a few of the reasons I see most commonly.  Review your situation and see if you might be better off selling your property than holding onto it.

Get a free property valuation now! Contact me today at 949-209-9696 or send me an email for more information about commercial real estate in the Inland Empire.

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Mike Lin, CRE