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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