Are you an investor considering whether or not it is time to sell your apartment property? The decision isn’t as easy as one may think, there is a lot to consider before taking that big leap. Today we’ll visit a video by BiggerPockets’, Michael Blank. Michael will take us through his decision process with one of his own properties.
Is it time to sell now? Sell in a few years? Or refinance?
Which of our 3 different scenarios will allow us to maximize our overall returns? In order to answer this question we should consider these 4 questions:
1. Have you created most or all of the value there is to create?
2. How attractive is the future cash-on-cash return?
3. What do you expect the market to do?
4. What yields a higher return?
The best way to answer these questions it to look at the Internal Rate of Return or IRR for each scenario; selling now, selling in a few years or refinancing. Calculating an IRR can be confusing to calculate on your own, but there are a number of tools that can aid in calculating this number, especially if you’re new to investing and the different metrics involved in commercial real estate.
Internal Rate of Return takes into consideration a number of things; 1.) capital going in and out of an investment, 2.) cash flow generated by the investment, and 3.) the passing of time and the time value of a dollar. Michael’s objective at this point is to calculate the IRRs given each scenario in order to help determine which option is the best for your circumstances. The goal here is to pick the scenario that has the highest IRR.
As mentioned before, IRR can be a confusing concept to grasp and calculating it can get tricky. According to Michael, in order to accurately calculate all three IRRs you’ll need to have a detailed financial model that will help you calculate all of your cash flows, cash investments, and any returns of capital. We like to use our IRR Calculator PRO, which not only calculates IRR but also calculates; cap rate, NPV, 10-year cash flow, NOI, and cash-on-cash returns.
Once you’ve calculated all 3 IRRs, compare them to each other – the scenario with the highest IRR will yield a higher return. But remember that one scenario isn’t fitting for every case, so make sure you do this same process for every property you consider on selling in the future and most importantly consult with an expert who can help you determine the best options.