At Progressive Real Estate Partners we frequently meet with property owners who talk about how much they dislike their investment property and, if they had it to do over, they would not have made the purchase. You would think this owner would be a logical seller. But when we do a valuation of the property and conclude that it is worth less than what they paid for it 5, 10 or 15 years ago, we often hear, “I don’t want to sell and take a loss”.
Here are 4 Reasons why an investor should seriously consider “Taking the Loss.”
- Risk vs. Reward – If an investor purchased a property for $6M and, despite the current environment of historically low cap rates and the best economy in 10 years, the property is only worth $5.3M, what are the odds that it will increase in value compared to the risk of decreasing in value? If the investor sells and reinvests in a better property that has much more likelihood of increasing in value, then selling and reinvesting makes a lot of sense.
- Need for Capital Investment – Frequently the only way to increase the value of the property is through common area and capital improvements that can’t be billed to the tenants either because the leases don’t allow it, or it is just not realistic to pass along such large expenses. Costs such as façade renovations, major parking lot improvements, painting the buildings, and investment in tenant improvements are all typical ways to create value that many owners just don’t want to do OR can’t afford to do thereby hoping value will increase without making these improvements which is not a good business strategy. If this is the situation, it makes much more sense to take the loss and move on to an investment that does not require the capital outlay.
- It’s Okay to Make a Mistake – Much of the time I think it is just people’s egos that gets in the way. They don’t want to admit they made a mistake. There seems to be this myth that you can’t lose money in real estate. At the same time, people will regularly sell stocks at a loss. It is okay to have made a mistake in buying a property that did not perform well. What should not be acceptable is holding onto this same property.
- There Could be Tax Benefits – The loss you take on one property might be able to offset losses on another investment. The loss could be particularly valuable in one year vs. another. Because this is clearly an accounting issue, investors should consult their tax advisor and have the discussion as to whether a property tax loss could potentially be of value in off-setting a gain.
Even the most successful investors occasionally have to take a loss but they also realize that by reinvesting in a better property they can often times offset the loss. What is even more important is sticking to a “no regrets” strategy so that they can achieve their long term investment goals AND feel good about it.