Knowing When It is Time to Sell
Phoenix Investment Real Estate

Phoenix real estate investors spend a good deal of time evaluating a property during acquisition to determine its ability to meet your specified investment objectives within your time horizon. However, once you own the property, the same rigorous evaluation should be done to ensure the property continues to performs to expectation. Set your investment goal and re-evaluate the performance of your property against your goal  annually.

The typical Phoenix real estate investor evaluates: the likelihood of future appreciation, the cash flow it produces, the ease or difficulty of managing the property, and the property's fit in an investor's overall investment portfolio. But they often overlook a simple and effective measure to determine the property's "Return on Equity." By analyzing return on equity, a real estate investor can compare a particular property with other possible investments in an effort to maximize your return on investment equity.

In the following example: A small Scottsdale fourplex was purchased several years ago on very favorable terms. It produces a respectable cash flow that resulted in an extraordinary 20% return in the first year. Even with the following assumptions listed below, which would produce a high return on equity, the return falls off to less than 5% after 7 years. It is time to determine if there is a better performing investment property available.

• 10% down payment
• 90% Loan-to-Value (LTV), 7% fixed mortgage over 30 years
• Appreciation at an average of 4% per year
• Annual net income increasing by 2% per year

Year

Value

Debt (7%)

Equity

Equity as
% of Value

Annual
Net Income

Return
on Equity

1

$300,000

$270,000

$30,000

10.0%

$6,000

20.0%

2

312,000

267,020

44,980

14.4%

6,120

13.6%

3

324,480

264,062

60,418

18.6%

6,242

10.3%

4

337,459

260,890

76,569

22.6%

6,367

8.3%

5

350,957

257,489

93,468

26.6%

6,494

6.9%

6

364,995

253,842

111,153

30.4%

6,624

5.9%

7

379,595

249,931

129,664

34.1%

6,756

5.2%

8

394,779

245,737

149,042

37.7%

6,891

4.6%

9

410,570

241,241

169,329

41.2%

7,028

4.1%

10

426,993

236,419

190,574

44.6%

7,168

3.7%

11

444,073

231,249

212,824

47.9%

7,311

3.4%

12

461,836

225,705

236,131

51.1%

7,457

3.1%

13

480,309

219,760

260,549

54.2%

7,606

2.9%

14

499,522

213,385

289,137

57.2%

7,758

2.7%

15

519,502

206,550

312,952

60.2%

7,913

2.5%

16

540,282

192,220

348,062

64.4%

8,071

2.3%

17

561,894

191,361

370,533

65.9%

8,232

2.2%

18

584,370

182,934

401,436

68.6%

8,396

2.0%

19

607,744

173,897

433,847

71.3%

8,563

1.9%

20

632,054

164,207

467,847

74.0%

8,734

1.8%

In the chart above, our investor's rate of return on equity starts to decline after about 7 years of ownership. In order to return to a better rate of return on equity, an investor should consider exchanging this investment property after 5-7 years and acquiring multiple replacement investment properties. The investor can duplicate the benefit of exchanges by continuing to move into more (or larger) properties with leverage that will continue to produce a higher return on their equity.

And at the same time you may have to revise your goal in light of current market factors. Certain areas in metro Phoenix are going to grow faster than others - creating unforeseen demand. An example of this is the new downtown ASU campus and the new UA Medical campus or just about anywhere along the new Light Rail network. The areas where your properties are located may be less desirable in comparison. Population growth, with the resulting traffic snarls, is driving construction of road and light rail and, in turn, is rapidly changing the dynamics of one area over another. It is exciting - but it requires ongoing re-evaluation of your real estate investment portfolio to capitalized on these changes.

Other helpful topics are: Tips for Buying Rental Property, Is your LLC working for you and providing the protection you expect, How to make money investing in real estate, How to buy and manage real estate within your IRA to build a retirement nest egg, Is a 1031 exchange right for you and Real Estate Investment Tax Tips.

In the event you find you have a property that is under-performing, please call me to help you liquidate your position and find a more productive investment property. I look forward to hearing from you in the near future.