Investment Properties: Know When to Hold ‘Em, Know When to Fold 'Em

One of the reasons for the recent uptick in home sales is the irresistible lure of a bargain property. For the past several years, investors have been picking up real estate at small fractions of their previous value. Since most of these people already have houses to live in, they find themselves exploring either the resale or rental market. 

In some circumstances, investors who planned on flipping a house found themselves unable to sell or uninterested in selling at the price they could get. Instead they joined the ranks of landlords in an effort to wait for prices to rise. The result of all this is there are a large number of property owners in the rental market who find themselves wondering whether they should stay or go, and if so, when. 

Naturally, there is no single answer to this question, but here are a few factors to consider in any individual situation.

• The first consideration is whether the property is cash positive, cash negative, or approximately running even. While an answer to this question might seem to provide all the guidance necessary, it is actually dependent on several additional inquiries.

• The next thing to consider is whether the area is declining, stagnant, or climbing. It is also important to consider any news of future urban plans that may affect the area. 

• Another important factor is that of how much capital is tied up in the project, and whether that money is best used somewhere else or can be safely parked where it is for a while.

Once this initial series of questions is answered, it is important to compare them to the possible scenarios listed below and then decide what choice is best for you.

• The worst of all possible worlds is the shipwreck property which eats money, is relentlessly cash negative, and has no hope of making it to safe harbor any time in the future. The only real option here is to abandon ship and save whatever you can.

• The castaway scenario is somewhat similar to a shipwreck, but involves a property where there is no immediate danger of ruin and some likelihood of eventual rescue, but you will have to be patient. Although it may be a little cash negative and perhaps even a little underwater, there are reasons to believe the market will improve and allow you to get off the island eventually with some money in your pocket.

• The long haul property is one that is making a little bit of money and has a chance to appreciate in value in keeping with general market conditions. You can probably get out now and not get hurt, but you will do better if you hang on.

• The home run is the one that everybody dreams about. It is in a nice, rapidly recovering neighborhood, is definitely cash positive, and can be cashed in at any time or held forever. The choice is yours.

Obviously, properties break down into two distinct groups. There are the ones which are permanent dogs, and the only choice is between taking a beating now or hoping to recoup some of the losses by being patient. 

The other group are either plow horses or show horses. These will make money no matter how you play it. A lot depends on what else you have cooking at the moment. If you have nothing else on tap, hang on. If you can make more money by cashing out, then do it.