Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Dispositions

One of the most crucial decisions in real estate is the decision to sell or hold. You must recognize that if you elect to do nothing, you are in essence electing to hold. If you sell when the market cap rate is 9 percent, and two years later the cap rate is 6 percent, then, unless you had other overwhelming motivations, you sold too early. Conversely, if the market cap rate is 6 percent and then a year later there is a severe recession resulting in numerous tenant defaults and a market cap rate of 12 percent, the investor who is cash-rich, the investor who liquidated his properties, might have had the best crystal ball.

The problem with this discussion is that it is easy to be a Monday morning quarterback; you can always call the right move after the play. The main task is to call where you are in the cycle. If the cap rate is 9 percent, it could go to 12 percent or fall to 6 percent.

In evaluating where value is going to go, part of your analysis should focus on interest rate/cap rate trends. If the yield curve is going up, it is probably going to go up longer than you anticipate. If the yield curve is going down, it probably will go down longer than you thought it would.

Another factor to focus on is the general economy. Are foreclosures up or down? Has unemployment increased or decreased? What is the outlook on bankruptcy filings? Has there been an increase or decrease in bankruptcy filings from last year? The gloomier the economic outlook, the worse things look, ...