Investment evaluation help

Amail · 04-21-2006, 01:18 PM

I'm trying to decide which is the better option - sell my investment property now for 480k or wait maybe a month or two and sell them for 500k. I got into them 14 months ago at 315k.

The quick sale now is almost a sure thing, but waiting another two months and realizing 12% higher profit sure is appealing. The sale at the higher price is not a sure thing within two months but that seems to be the timeframe.

Where is the market headed? Using broad strokes, things look poised for a correction. Where I'm at there is no vacant land and the city is undergoing a renaissance, so I'm fairly comfortable that these properties will weather a correction quite well. They are in a prime redevelopment area.

I am out about $750/mo supporting the properties, but I can spend that several times before I'm worried about putting a big ding in a $40k difference in profits.

I think Internal Rate of Return calculations are what I need to evaluate this, but I can't figure out how to set it up. Any Excel financial gurus out there help a brotha' out?

Moneyguy1 · 04-21-2006, 03:01 PM

One factor is the monthly mortgage payment. If the monthly payment total over, say, six months, exceeds the expected increase in value, then it would be logical to sell it now.

Amail · 04-21-2006, 03:08 PM

These are fully rented four-plex buildings that are essentially breaking even. My $750 monthly out of pocket is financing the money I put into the deal at the beginning for down payments and closing costs.

jrdavid68 · 04-21-2006, 03:29 PM

Put it on the market for $510k now and see what happens. Set the listing up for 60 days and then re-list it so it shows new on the MLS at that time if it doesn't sell.

Amail · 04-21-2006, 03:39 PM

I'd had it listed for over six months at $495k, then reduced to $485k with another agent. Some nibbles, but at these prices it's really the developers that would be interested. You just can't make them cash flow at this price point, and that puts a lot of mom and pop investors out of the running.

My agreement with that agent expired. I am talking now with another agent that deals primarily with commercial property and development projects in particular. She had some interested developers at the $500k mark, but so far they just don't seem to want to get off the dime. She suggested that she could just sell them now for me at $480k at an upcoming conference or I could wait until she puts together another developer deal in a couple months.

I told her I was kinda set on the $500k and would have to think about it.

Short story long, these are properties that you have to market to developers. As such, MLS listings really don't swing it.

Moses · 04-21-2006, 03:40 PM

Pigs get fat, hogs get slaughtered.

Amail · 04-21-2006, 03:47 PM

Quote:

Originally posted by Moses
Pigs get fat, hogs get slaughtered.

...and the second mouse gets the cheese.

Not that you're wrong, but I'll make my business decisions based on objective analysis of all available information rather than folksy wisdom.

Hence the request for help calculating IRR correctly.

Moses · 04-21-2006, 03:54 PM

Would I risk a sure thing for a "maybe" + 12%? Depends. If you are flush with cash and assets, waiting...and possibly losing, is not really a problem. If this represents a significant portion of your net worth, take the sure thing and be happy.

Moneyguy1 · 04-21-2006, 06:13 PM

I would need far more information than provided to make even a wild a$$ed stab..

Too complex for over the internet anyway, and it would involve some work on my part and you don't want a bill.....

Big Ed · 04-21-2006, 07:51 PM

Don't be an *********. Sell and take your $165K in 14 months.

Moses · 04-21-2006, 08:17 PM

Quote:

Originally posted by Big Ed
Don't be an *********. Sell and take your $165K in 14 months.

That's one way to put it...

GDSOB · GDSOB's Garage

If 480K was the number, you should have seen an offer for close to that already. If these are breaking even at your level of investment, they are big time cash flow negative at your selling price.

Since the operating income doesn't offer buyers a rate of return at this number, your potential buyers are the developers/ speculators only. So you are betting that the property continues to appreciate at 25% per yr to get to 500K in two months.

If you believe the realtor that that price is reasonable, then you are spending $1500 to make 20K in two months. Pretty good return eh? It looks like you are counting on the market catching up with your price.

I'd sell and move on to another opportunity. This one's about tapped out... (what Big Ed said...)

Amail · 04-22-2006, 09:58 AM

So clearly the consesus is that I should sell these now, that if I wait for the higher price it is simply greed. Having seen plenty of real estate collapse chatter on this forum, I exepected it.

This is a risk/reward decision. I don't need people to hammer home the risks. I need to know how to use a tool. Many of you are business people and deal with cash flows and risk/reward decisions constantly. I've got to believe that you make these decisions with some objectivity.

Putting aside your judgements on my choices for the moment, can someone, anyone, please tell me how to calculate Internal Rate of Return. Or if that's the wrong tool, tell me how else I might *objectively* evaluate this.

I think in the long term I need to go back to school and take some business classes.

turbo6bar · 04-22-2006, 11:04 AM

Do you really need a spreadsheet to determine 12% return over 2 months is not an great return?

What is the cap rate? Compare it to a riskless rate of return for some objective output.

I may have a spreadsheet for IRR, but I do believe it is superflous to your decision. Drop me a PM.

GDSOB · GDSOB's Garage

http://en.wikipedia.org/wiki/Internal_rate_of_return

IRR used to compare different income streams with NPV=0

I'm not sure what you are trying to do. You have a return on investment based on what you have spent on the apt bldg and what you sell it for +/- any income/expenses. Objectively analyzing whether to spend 750/mo to get 10,000 equity each month then ROI=1330% makes a no brainer helluva deal. Based on this, you should hold on until retirement and then sell for several $billions.

Are you trying to compare this investment to something else? The return is not the issue, its the "what if's".

Moses · 04-22-2006, 12:49 PM

Quote:

Originally posted by GDSOB
The return is not the issue, its the "what if's".

Precisely. In this case, whe "what ifs" absolutely dwarf any ROR calculations, rendering them meaningless.

What will the market be like in two or three months? Will there be a buyer out there for your property? And MOST importantly... is this big money for you? How would your life be affected if you end up selling in a few years at a loss?

Seahawk · 04-22-2006, 01:11 PM

Quote:

Originally posted by Amail
I think in the long term I need to go back to school and take some business classes.

When and if you do, pay particular attention to a few terms missing from your post:

- Taxes. Your tax posture is a key element in any liquidation if another investment property is not currently planned.

- Opportunity cost.

- The long term, not just going to school.

- Portfolio.

- Folksy Wisdom (Also known as heuristics, or rules of thumb). Ignore at you peril.

pwd72s · 04-23-2006, 07:58 AM

Quote:

Originally posted by Seahawk
When and if you do, pay particular attention to a few terms missing from your post:

- Taxes. Your tax posture is a key element in any liquidation if another investment property is not currently planned.

- Opportunity cost.

- The long term, not just going to school.

- Portfolio.

- Folksy Wisdom (Also known as heuristics, or rules of thumb). Ignore at you peril.

Couldn't agree more!