Your Investments: When To Sell And When To Hold
There is no shortage of financial literature about when to buy a stock, but determining a strategy for holding or selling a stock is also important. Investors must consider several factors before buying or selling an investment, including how much risk they’re willing to take and when they’ll need the money.
In other words, investors should have a financial plan that outlines their investment and financial goals for the short and long term. This article will look at some of the factors for when and why investors might sell a stock.
Additional Factors To Consider
Buying a property requires more initial capital than investing in stocks, mutual funds, or even REITs. However, when purchasing property, investors have more leverage over their money, enabling them to buy a more valuable investment vehicle.
Putting $25,000 into securities buys $25,000 in valueassuming you’re not using . Conversely, the same investment in real estate could buy $125,000 or so in property with a mortgage and tax-deductible interest.
Cash garnered from rent is expected to cover the mortgage, insurance, property taxes, and repairs. But a well-managed property also generates income for the owners. Additional real estate investment benefits include depreciation and other tax write-offs.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development .
Real estate that generates monthly rental income can increase with inflation even in a rent-controlled area, which offers an additional advantage. Another consideration is taxes after selling the investment. Selling stocks typically results in capital gains taxes. Real estate capital gains can be deferred if another property is purchased after the sale, called a 1031 exchange in the tax code.
What Is Cap Rate
Cap rate is a calculation used to determine an investment propertys profitability. A high cap rate would happen if you purchased a property for a small amount of money but you rent it for a high price. High cap rate is usually indicative of a good deal. What is considered a good cap rate depends on where you live. In a large city with high rental costs, 4% can be considered cap rate. In rural areas or regions with lower rental costs, a cap rate can go as high as 10%.
Rental income should increase faster than your operating expenses, which would raise your cap rate over time. But sometimes cap rates fall, and investors consider selling.
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Selling Stocks To Buy A House
If you realize a gain on your stock holdings, you still have to pay a capital gains tax even if you immediately intend to put those gains to use by purchasing a house. The IRS views these events as mutually exclusive. You get a tax break only if you sell your home and use the proceeds to buy another home within two years of the sale. In such a case, you avoid capital gains tax unless your gain exceeded the maximum allowed for your filing status.
Both Come With Advantages And Risks
The Balance / Ellen Lindner
There are basic differences when it comes to investing in real estate versus stocks, but how well you do with either depends a lot on timing. Very few stocks would have beat buying beachfront property in California in the 1970s and selling 20 years later, and virtually no real estate purchase could have beat the returns you would have earned if you had invested in shares of Microsoft, Apple, Amazon, or Walmart early in those companies’ histories.
Timing is impossible to predict when making investment choices, but understanding each type of investment is key to choosing the best strategy to help your money grow and create financial security.
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Accurately Calculate The Expenses Of Owning A Rental Property
The main operating expenses which are easy to calculate and budget for monthly are:
- landlord insurance
- homeowners association or condo fees
- property maintenance
- mortgage payments.
Be sure to factor in unexpected costs as well. You’ll have regular maintenance costs, such as replacing HVAC filters. And you’ll likely have repair costs that will vary year to year based on when appliances break or wear out and need replacement.
The initial purchase of the property has unique expenses, including closing costs , lender and title company fees, and escrow items such as property taxes and mortgage insurance. Budget for future expenditures such as a new roof, water heater, and appliances.
Decide Whether Or Not To Buy & Set Your Budget
Because buying a house is such a big financial move, it may not be for you. Theres nothing wrong with continuing to rent for a while.
For one, rather than being the investment many people assume a house is: a house is actually just one big expense. You have high-cost payments on it every single month, youre responsible for all upkeep and repairs, youll pay taxes on ownership, etc. Yes, it may increase in value, but thats usually not the best way to grow your money if investing is your goal.
Lets say you bought a slightly cheaper-than-average house for $1.3 million. In 55 years, a 3.96% rate of return will make the house worth $9,890,271. But if you invested that same $1.3 million in cash into the stock market at 9.6% growth for 55 years, thatd be a massive $108,620,554 nest egg.
Life isnt all about money though, so if you want a house to call home, need it for a growing family, or other life reasons, buying is a totally valid choice.
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Overview Of My Rental Property Investment
Before I get started, let me be clear that this was my first attempt at real estate investing, and I was by no means an expert back then. Just like every other rental investor, I read a bunch of books on the topic, watched a lot of YouTube videos, and essentially, tried to emulate what other people in my family had done previously. Finally, please note that the numbers presented below are just a rough illustration to give you an idea of my reasoning back then.
I bought the property for $50,000 and the monthly rent was about $500.
You multiply $500 by 12 and you get $6,000 of annual income, which represents a 12% gross return.
Sounds pretty good, doesn’t it?
The property was located in a student city and it wasn’t too far from the campus, and therefore, I could easily find tenants.
Moreover, I could finance most of the purchase price with cheap debt. I don’t exactly remember the terms back then, but let’s say that I paid $15,000 cash and the remaining $35,000 came from a mortgage. The interest rate must have been around 3.5% back then .
So on a leveraged basis, the returns were incredible.
- $6,000 of gross income
- $1,225 of interest expense
- = $4,775 of gross income net of interest expense
With only $15,000 invested out of my own pocket, that’s a 32% annual total return! I did not expect much growth or appreciation because the city was stagnating, but even if you added just 2-3% per year, you get your total return near 50% per year on a leveraged basis.
Factor In The Tax Implications Of Selling
You want to factor in all the costs of selling when evaluating whether it makes sense to sell or not. When you sell an investment property, your profit or gain is subject to either short-term or long-term capital gains tax.
Under the current tax law, if you have owned an investment property for less than a year, your gain is taxed at your current income tax rate. Long-term investments are typically taxed as capital gains at 15% or 20% depending on your tax bracket.
You’ll also need to pay tax on depreciation recapture when you sell a long-term investment. Depreciation is a tax deduction you take annually when you own an investment property. Whether you took the depreciation write-off or not, the cumulative value of that annual deduction becomes taxable income when you sell.
> > Further Reading: How to Lower Your Closing Costs
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What Is A Flow
You are a member of, or investor in, a flow-through entity if you own shares or units of, or an interest in, one of the following:
Why Should I Add Real Estate To My Portfolio
Real estate is a distinct asset class that many experts agree should be a part of a well-diversified portfolio. This is because real estate does not usually closely correlate with stocks, bonds, or commodities. Real estate investments can also produce income from rents or mortgage payments in addition to the potential for capital gains.
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I Plan To Sell Soon Anyway
A few more months of passive income is beneficial, but if youve been thinking about selling in the near future anyway, it can be smart to sell when you know you can fetch a high sale price. After all, if you wait and have to sell at a lower price down the road, those monthly rent checks may not have been worth it.
When To Sell A Rental Property
Your rental property was once a great source of passive income. Now its a maintenance headache with minimal profit. What should you do? Just because most real estate investors opt for the buy and hold strategy doesnt make it right for you especially if you believe your money could be better invested elsewhere.
Most homeowners look at housing market trends to determine the right time to sell, but there are additional factors at play for rental property owners. Before you decide to sell your rental home, youll need to consider economic factors, your personal financial situation, maintenance needs, taxes and more. In this article, well answer common questions rental property owners ask themselves before deciding to sell.
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Change In Ownership Or Merger
Sometimes it may make sense to sell a stock if a company has been acquired or merges with another company. Many times the stock price can rise dramatically if it is acquired for a significant premium. As a result, investors may sell the stock after the merger. However, itâs important to determine whether the company’s fundamentals are better after the merger or acquisition and if not, it may be time to sell and put the money elsewhere.
You Can’t Afford The Maintenance Or Needed Renovations
Maintenance and renovations are a constant cost of rental property ownership. Maybe you’ve been putting off maintenance because your tenant has been there for 10 years and never complained. But now they’re moving out, and you don’t have the funds for those neglected repairs and necessary upgrades before placing a new tenant. This could mean it’s a good time to sell to another investor in an as is condition and move on.
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Why Would You Sell Stock To Buy A House
The 2022 U.S. housing market has been and will be red-hot. In a sellerâs market, buyers have to work every advantage they can to get their dream home. One such advantage is a large down payment.
A big down payment will lower your monthly mortgage payment, but by lessening the total mortgage amount, it mitigates the lenderâs risk. That security looks good to a seller and can serve as an advantage in a competitive bidding war. If selling some stock can get you up to 20% of the homeâs purchase price, itâs a great help.
How To Reduce Or Avoid Capital Gains Taxes
Capital gains taxes can take a significant bite out of your profits. But there are ways to reduce or even avoid these taxes on the proceeds from the sale. Here are three strategies.
- Turn Your Investment Property into Your Primary Residence
The easiest way to limit or avoid the capital gains tax is to convert your investment property to your primary residence. The reason? If you sell a primary residence, you dont have to pay taxes on the entire gain. Thats because IRS Section 121 lets you exclude up to:
- $250,000 of capital gains on real estate if youre a single filer.
- $500,000 of capital gains on real estate if youre married and filing jointly.
To count as your primary residence, you must own and live in the house for at least two of the five years immediately preceding the sale. Say, for example, that you bought an investment property in 2010, and in 2015 you converted it to your primary residence. In other words, you moved in and called it home. In 2019, you can then sell the property as a primary residence because you lived in it for at least two out of the previous five years.
Of course, if the property you own is of significant value, the limit is $500,000 and not very useful.
- Use Capital losses to Offset capital gains
If you have $50,000 in long-term gains from the sale of one stock, but $20,000 in long-term losses from the sale of another, then you may only be taxed on $30,000 worth of long-term capital gains.
$50,000 $20,000 = $30,000 long-term capital gains
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Does It Make Sense From A Cash Flow Perspective
Making sure you have enough cash flow is important for covering the expenses associated with owning a property as mentioned above. Without it, there could be a huge negative impact on your investments and potentially your financial plan.
For instance, we had a client make a down payment on a $1 million home, leaving $1 million left in his account to cover mortgage payments. Six months later, the stock market had a downturn, and this account had lost 20% of its value. Now valued at $800,000, his account balance continued to diminish due to ongoing mortgage payments and other new housing costs during the bear market. He then had to consider dialing back the risk on his account to protect his investments against further losses. However, as his portfolio became more conservative, so did his returns. This ultimately resulted in him having to work longer than he wanted to maintain his lifestyle.
Buying A House Vs Investing In The Stock Market
- Investing in real estate and the stock market are both passive income sources
- Investing in the stock market can potentially yield better returns over time
- Both come with its own set of risks that all investors should consider
Unpopular opinion: Investing in the stock market is better than investing in real estate over the long term. Put simply, an investment in real estate earns just three to four percent per year historically on the contrary, investments in the stock market post about 10 percent annual returns. That can amount to an impressive return on investment .
And, when you invest with Q.ais artificial intelligence-powered technology, youre well-poised to maximize your returns and minimize your risks.
So, would you invest in a house or a stock? Why? Lets unpack the answers to some of the most frequently asked questions about buying a house vs. investing in the stock market.
for more investing content and access to over a dozen AI-powered investment strategies. Start with just $100 and never pay fees or commissions.
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What Is The Opportunity Cost Of Not Staying Invested
It is always important to analyze the opportunity costs of any major financial decision, such as purchasing a second home. On one hand, you can choose to sell your investments to buy a $1 million home, turning your dream into a reality.
And on the other hand, depending on your life expectancy, this move could also potentially cost $1 million or more in future investment growth. For some people, this cost wont have a major impact on achieving their financial goals, but for others it could harm their financial plan.
While you may be able to buy a second home with your investments, can you really afford to over the long haul? Using your investments to cover the costs of owning a property prevents them from appreciating over time. This could serve as a potential setback, causing other areas in your financial plan to suffer. To catch back up, you may have to make changes in your plan, such as delaying retirement or reducing your spending.
Another opportunity cost is forgoing the opportunity to travel to other places since youre maintaining a property. Oftentimes when people purchase a second home, they feel obligated to use it as much as possible since they are paying for it. This sense of obligation may prevent you from traveling to other destinations you wanted to visit.
