by Damon Carr, For New Pittsburgh Courier
Damon, I’m curious to know what your take is on this. Someone is begging me to sell them my waterfront villa that I purchased 4 years ago at $730k. It’s now valued at $1.7 million. He is willing to pay $2 million. There are no more waterfront villas available. Should I hold on to it or cash in?
I put this question before my Facebook audience to weigh in. The overall response was 50/50. Half suggested holding the property. The other half suggested selling the property. Below are a few of the responses. After which, I’ll share what I would do if it was me.
I have a friend whose father purchased land for $700. When he passed, he left it to my friend. My friend just sold that property for $2.7 million. We need to quit being concerned with ourselves and teach our children and ourselves how not to be so consumed with things.
Cash in (especially if one isn’t using it). The market isn’t going to stay hot forever. That’s an amazing come up and ROI. Put it on the market and let them fight for it. The buyers set the tone for pricing in a hot market. Someone may offer $2.5 million. With hot properties you never know what someone would be willing to pay. If someone offers $2-plus million in CASH, run with it.
~Janeen S., Realtor
In about another 5 to 10 years, it’ll probably be worth twice that. No way I would sell it!
I’d probably cash it in. That ROI is crazy.
Also, waterfront properties nowadays are suffering major losses due to natural disasters and global warming. As much as I wanted to own some waterfront property, I wouldn’t ever do it now.
Damon here: There’s no wrong answer! It’s a matter of personal preference, financial circumstances, and overall financial goals.
It’s an easy decision for me. “RUN ME MY MONEY!” Here’s my reasoning. It’s a vacation/rental property. This property is for leisure and income.
If you had an opportunity to triple your investment in four years and walk away unscathed, would you do it? I think that the majority of people reading this column would give a resounding yes!
That’s essentially what’s happening here. There’s an offer on the table that will give her a 260 percent return on the purchase price of the property. She paid $750k. She has a buyer willing to pay $2 million. That’s nearly three times what she paid for it.
Actually it’s far more than a 3X return when you look at it from a cash on cash return on investment. Chances are there’s a mortgage on this property. Meaning her true cash investment was down payment, closing cost, and the mortgage payment that was made over that four-year period.
You’re probably looking at a $200,000 total out-of-pocket cash investment. Let’s assume there’s a mortgage balance of approximately $600,000. If you sell this property for $2,000,000, after paying off the mortgage, you’ll walk away with approximately $1,400,000. That’s a 700 percent cash on cash return on your investment in only four years. That’s freaking insane. To give you historical perspective, the best performing asset class is stocks. The average return on stocks is 10 percent per year. The average appreciation or increase in value for real estate property year over year is five percent. For a property to increase in value from $750,000 to $2,000,000 in four years, that’s an average annual increase in value of approximately 41 percent per year. Based on historical data, the average appreciation of this property is grossly exaggerated in comparison to the norm. Could it be a real estate bubble in this particular market that has peaked. If so, at some point, there’s only one direction for the value of this property to go. That’s down.
Many of the people who responded to this question on my Facebook page stated that the property could go up in value. Sure! That’s possible. It could go up in value. That’s called upside potential. There’s two sides to all investments. Upside potential and downside risk. Downside risk could be vacancy, tenants who are slow to pay rent or refuse to pay rent. Maintenance and upkeep of property—just to name a few. You have to consider both—upside potential and downside risk.
In our back and forth conversation, she mentioned long-term rental income is averaging $10k to $12k per month. That’s good rent on a $750,000 property. Poor rent on a $1.7-$2 million property. Monthly rental income should be a minimum of 1 percent of market value. Minimum monthly rent on a $750,000 property should be $7,500 per month. It is currently receiving $10k to $12k. Great! Rental income on a $1.7-$2 million property should be $17,000-$20,000 per month. That makes the $10k to $12k monthly rent currently received not so great.
Again, there’s no wrong answer here. My opinion in this article is based on what I would do if I woke up with such an offer on the table. She’s considering the offer but she is leaning towards holding on to the property. Her acquisition of this property and other real estate property is a part of her overall retirement plan. She believes that she can get bigger returns investing in real estate than she can investing in the stock market. Considering the fact, she’s observed a 300–700 percent return on investment on this property, it’s going to be hard to convince her otherwise. It’s important to point out. She does both. She invests in real estate and she invests in the stock market.
If she were to sell the property, take the $1.4 million and invest it in the stock market using a diversified investment portfolio, this money would grow to $8.9 million over the next 20 years—her projected retirement year.
Will this property be worth more than $8.9 million 20 years from now? Only time will tell.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com)