To Buy Sonoma county real estate or to Hold—That is the Question

Exit strategies for real estate investors in Sonoma county

BY MARIWYN EVANS

Buying the right property at the right price is essential to successful real estate investing. But so is knowing when to sell for maximum profit. As a companion to the August REALTOR® Magazine “Build Your Real Estate Portfolio” article on locating and selecting investment properties, some successful real estate investors tell us how they handle the other end of the transaction.

For many real estate professionals, selling investment properties isn’t part of the equation. “I’m a better holder than I am a seller,” acknowledges Bill Watson of the 38-office Watson Realty Corp., headquartered in Jacksonville, Fla. “My goal is investing in the future, and not the quick turnaround. I periodically upgrade properties by selling non-performers and replacing them with newer, higher end homes.” After investing for nearly 40 years, Watson’s portfolio of 150-plus single-family homes has become an excellent source of cash flow. He also refinances the properties periodically to take out equity.

"My CPA recommends not holding properties past the point at which the depreciation provides a tax shelter for income. There’s nothing wrong with excellent cash flow, and I like the security of knowing that if I have to raise capital, I can put four or five homes on the market,” says Watson. The depreciation period for residential investment property is currently 27.5 years, but most properties only generate on-paper losses for the first seven to ten years when the Modified Accelerated Cost Recovery System of depreciation is used. (Publication 527: Residential Rental Property)

At the opposite end of the hold-sell spectrum is Michael Zaransky, chairman of Prime Property Investors, Ltd., Northbrook, Ill., who with partner Barbara Gaffen is now investing in B and C multifamily properties to reposition and sell to investors. “We always look at our exit strategy going in. We want to know what the gross selling price will be when we try to sell it a year or two from now,” says Zaransky. To determine future sale price, he analyzes price per unit and price per square foot in the property’s market. “We also constantly watch market rents to project future net operating income,” he says. When it does come time to sell, Zaransky, like many investors, favors 1031 exchanges, which allow owners to defer capital gains on a property.

Ken Zablotny of Metro Brokers Zablotny & Company in Littleton, Colo., is also a believer in 1031 exchanges for implementing his current investment strategy. “As I get closer to retirement, I’m trying to consolidate my holdings into fewer, large buildings located in the same general area. They’re easier and less expensive to manage.” Fewer sites to visits and fewer individual pieces of equipment to maintain make the difference. Since Zablotny plans to turn over management to an outside company once he retires, lowering management costs are important.

J.T. Purvis, owner of ERA National Realty of Arizona in Prescott, Ariz., also favors 1031 exchanges when feasible, but acknowledges that “at some point you have to pay the taxes.”

Early in his 29 year investing career, Purvis was an advocate of the buy-and-hold investment school, but now that he’s “older and wiser, I’ve learned that markets can move past a property, and you lose your peak price. You should never plan on holding forever.” Purvis knows it’s time to sell when “depreciation decreases, maintenance increases, and rents stabilize for two years or more.” He also watches for the growth patterns in his markets to see where the new hot areas are. So whether your investment strategy is a quick flip or a long hold, don’t ignore the signs that say: "Sell Now."