Why would I sell real estate?

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I often joke on this blog that you should never sell apartment buildings. The main reason is that the transaction costs of selling real estate are high (brokerage commission, transfer tax, etc.). Also, in CA, there’s a major benefit to holding on as your rents increase, because your NOI margin increases (see here for more details).

But, obviously, there are a few reasons that you might want to sell:

1. To return capital to investors: This is the reason I’m selling 1239 N. Westmoreland. Once you’ve added a bunch of value to a building, holding it for a long time just serves to drag the IRR down towards the new yield on rents. So there’s a point where it makes sense to sell and let someone else collect the yield.

2. To shift capital to a higher-upside property (using a 1031 exchange): You might find yourself owning a property in an area where the rents are stagnant. If debt is cheap and the market is good (like now), it can make sense to sell your property and do a 1031 exchange into another property in an area with more upside.

3. When your depreciation is used up (or has shrunk): The government allows you to deduct an amount equal to 1/27.5 of the initial value of the structure on a property each year from your taxes for 27.5 years (more info here). Once you’ve reached the end of that period, your asset is fully-depreciated (from a tax perspective) and you lose the tax shield that depreciation provides. At this point, it probably makes sense to 1031 into another income property, which re-starts the depreciation clock (on the new asset). Another flavor of this is the situation where the rents are increasing but the depreciation allowance isn’t (because it’s pegged to the original purchase price), meaning that depreciation is shielding less and less of your income from taxation.

Can you think of any other reasons to sell?

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