Cash Out or Reinvest When You’re Rich on Paper?

What a great question to consider! The number of variables going into this answer would easily fill a book. Just to narrow this down, lets’ define cashing out as selling your real estate holdings to use the cash for another purpose. Maybe it’s retirement and you want to move your money into a super secure investment like an insured savings account where the risk of losing money is almost zero but your money won’t keep up with inflation. Or maybe you just want to take all the money to go on a wild spending spree starting with a trip around the world.

First Step When Deciding to Cash Out or Reinvest

Hopefully, as a real estate investor, you find yourself in the enviable position of needing to decide whether to cash out or reinvest the appreciated value of your existing properties. Many investors that bought at the bottom of the market (around 2012) are now in the desirable position of controlling property that has significantly appreciated in value.

This means reviewing your portfolio to decide if holding is the right thing to do or if cashing out is the best option. A few important variables to consider include:

  • How much wealth you have and how much you want?
  • How diversified your portfolio is?
  • Are there better investing opportunities available?
  • Your current ROI?
  • Major life events such as retirement or funding a child’s college education?
  • Switching from active to passive income streams?
  • Many others based on your personal circumstances?

Here are basic possibilities that I think help most people make the decision whether to cash out or reinvest:

Cash out when the effort to own and manage properties becomes more painful than the joy of earning.

-OR-

Reinvest towards an income stream that provides the highest return with the least amount of work.

Real Estate Cycles

Real estate investing goes through cycles. There are times to buy (low point of the cycle), times to hold (middle), and times to sell (high). This isn’t complicated. All types of investing are about buying low and selling high. What is more complicated is deciding whether to cash out or reinvest your real estate holdings.

The ideal time to buy during the current cycle  was 6 or 7 years ago (low point). Since then, rents and property values have been steadily increasing. These are the years to hold and profit (mid point). I don’t have a crystal ball but based on many years of experience, now is the time to be considering selling at the high point. With that, comes the decision to cash out or reinvest your real estate holdings.

Reinvesting Options

You might want to diversify your investments outside of real estate into something like gold or the stock market. Those aren’t my forte so I’m not going there. What I do know is there are much better options than cashing out to finance that around the world trip and a life of luxury. Mainly because real estate investments are a chance to have your cake and eat it to! What I mean is you can sell a property, take some cash out for that trip, and reinvest most of it to continue a passive income stream enabling a life of more luxury.

Perfectly timing the real estate cycle is impossible. However, each phase of the cycle is long enough that you have ample time to take advantage of each phase. With this being the high point of the cycle, it may not be the exact time to sell but it is the right time to be considering what you will reinvest in during the inevitable low point. You should also be working on marketing materials for the properties you anticipate selling while we are still at the high point.

Regardless of the cycle phase, I’m always looking for sandwich lease option opportunities. These work fantastically in all phases and are particularly profitable during this high point because there are so many people that want to buy but are just a whisker away from qualifying for a loan. The sandwich lease is the perfect bridge between renting and homeownership.

Once we enter the low point, you’ll find me writing about and emphasizing how to invest in distressed properties that include foreclosures, REOs, short sales, and how to find individuals desperate to sell.

Cash Out or Reinvest Tax Considerations

If you cash out and pocket the money you are going to be hit with a huge tax bill unless you have a tax strategy. On the other hand, reinvesting in real estate offers the best tax deferred and possibly tax free strategy available with the 1031 Tax Exchange. Note: the tax free version requires an additional strategy involving trusts, annuities, or something similar. But deferring 100% of taxes is available to all real estate investors any time they sell.

Depending how long you’ve owned the properties, moving the money elsewhere will almost certainly result in long or short term capital gains taxes along with state and local taxes. When you reinvest in real estate, the 1031 section of the IRS tax code enables you to reinvest in a different (typically more valuable) property without paying the capital gains taxes or the depreciation recapture tax.

As you ponder whether to cash out or reinvest, it’s a good time to consider using a 1031 exchange to move into a more passive income property. One delivering reliably high income but that is low maintenance and less management.

The 1031 exchange does require that you make a “like-kind” investment. That doesn’t mean that you need to replace your existing eight single-family houses with different eight single-family houses. It only means that you have to replace your real estate investment with another real estate investment. To receive the full tax benefits, you do have to purchase a replacement property that is of equal or higher value. Instead of eight single-family houses, that could be a 60 unit apartment building with an onsite property manager.

What you need to do now is TAKE ACTION!

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

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The Diversity and Phases of Commercial Property Investing

Brick and mortar retail is melting down. However, this doesn’t mean that commercial properties are crashing in general. Although online retail continues hammering away at brick and mortar, some retail malls are showing promise when repurposed into multiuse communities offering homes with convenient access to restaurants, entertainment, medical clinics, and even retail. Still, commercial properties include much more than retail stores.

The Diversity Commercial Real Estate Investing Offers

Commercial property investing offers a tremendous number of sectors and niche sectors. The major sectors are:

  • Office Buildings
  • Industrial (including manufacturing, warehouses, and specialty)
  • Retail/Restaurant
  • Multifamily
  • Land
  • Miscellaneous (hotels and medical are included but often considered as separate categories).

Commercial properties are incredibly diverse within each major category. For instance, office buildings include everything from a 100 story building in NYC to a small accounting office on Main Street USA. And although the commercial property investing cycle follows the macro economy, each category has individual cycles within the macro cycle. Notably, student housing, manufactured homes, and industrial properties have been the top performing commercial real-estate sectors over the past 12 months, according to Green Street Advisors. And counter to the single-family residential market, multifamily housing investing has slowed substantially during the same time.

Market and sector knowledge is critical to your success with commercial property investing. If you have personal knowledge about a particular commercial sector, stay with that sector. If you have no knowledge about a sector, gain the knowledge you need before investing. Even if you’re only the landlord, you don’t want to invest in a hotel if you don’t know anything about the hospitality industry. Same thing with the manufacturing sector. You don’t want to own an industrial strip if you don’t know the best use of the property to maximize cash flow.

Commercial Real Estate Valuation

Commercial property investing differs in many ways from residential investing. Property income, expenses, and values are calculated differently and success requires speaking the language of commercial real estate fluently. Along with sector knowledge, you need to learn new profit and loss formulas before investing commercially. In residential you may have only bought properties for 75% of after repair market value or rentals that cash flowed 15% above expenses. In commercial real estate, you need to understand cap rates, net operating income, and loan to value ratios. These are not difficult but you need to fully understand what each means and how they affect your profitability before moving into commercial property.

Residential property valuations are heavily dependent on an appraisal comparing similar houses in the neighborhood. Commercial values are much more dependent upon the amount cash each generates. There are other valuation methods. For one, the Income Capitalization method is based primarily on the amount of income an investor expects to receive from a particular property. An example is a building purchased for $1 million, and expected to yield 8 percent based on local market research. That $80,000 per year in expected income could be increased by improving inefficiencies and/or by passing along some costs to the tenant, like electric or water usage. Something that commercial property investors look for are rents that can easily be increased because they are below market.

Expected future income capitalization is reflected in the present value. Value is linked to rental income via the property’s cap rate. The equation for the property value is:

Current Value = Net Operating Income / Cap Rate

The cap rate is calculated from market sales of comparable properties in the same neighborhood. The cap rate can be adjusted to account for unique features of the property, such as high-quality tenants or an unattractive/outdated façade.

The advantage of the income approach for commercial property investing is that it accommodates recent sales activity of comparable properties and is adjusted for unique factors. Its disadvantage is that it doesn’t account for vacancies, which might lead to an overstated net operating income (NOI) and value.

Commercial Real Estate Phases

Not every element is present during every cycle phase but these are the signals you are looking for. Also, specific sectors can go through these phases separate from the macro cycle (such as retail and multifamily are today).

A better term than phases is probably the circle of commercial real estate phases because each phase consistently follows the other. For instance, recovery begins after recession and precedes expansion.

Recovery. This is broadly defined as declining vacancy rates following recession without new construction occurring. Typically, a recession occurs when new construction exceeds the demand created during expansion. Recovery occurs when excess inventory from the previous expansion is finally absorbed (e.g. vacancy rates drop). The latter part of the recovery phase is a mostly balanced market.

Expansion. When demand during the recovery phase exceeds available inventory, the market begins expanding with new construction. This is typically noted with rapid rent increases. Of course, rent growth means more income which rises the value of existing (ready to occupy) properties. During the early to mid-expansion phase is a good time for commercial real estate investors to sell for the highest profit. As long as demand grows faster than supply, vacancy rates continue to fall and the expansion continues.

Hyper supply. At some point, supply catches up with demand. The first indication is when the pace of rent increases slows. This is near the point of equilibrium, and marks the end of the expansion phase. When the supply of new construction exceeds demand, vacancies begin to rise and rents begin to fall. If new construction slows enough a severe downturn is avoided. However, because new construction takes a long time to become occupant ready, new construction already in the pipeline often leads to hyper supply.

Recession. When the oversupply becomes massive, it leads to a recession. It’s noted by increasing vacancies that cause rents to be lowered. Losses can occur from lower rents and rising interest rates if balloon payments come due. This is not the time to sell. Recession is a buyers’ market because the next phase in the circle of commercial property investing is recovery.

If you want to further discuss commercial property investing as a wealth building strategy, please click here.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

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