Selling Price Calculations
An investment property may be sold for a variety of reasons of which some of the more common are:
to offset or at least mitigate any existing losses
to obtain a higher profit on sales over any profit from rent
to release funds for more profitable investments
Mitigate Existing Losses
In this scenario the selling price of the
investment property must cover the accumulated losses it generated and any anticipated selling expenses such as legal and commission fees. For example, an investment property generated an accumulated loss of $20,000 over 5 years and an anticipated selling cost of $2,000. In this case, the mininum selling price is $52,000. This is assuming that any sale is immediate as any delays result into additional losses.
Higher Profit on Sales over Rent
To ascertain the selling price of the
investment property one must compare the profits of the sale to any anticipated profits from rent. For the latter, this can be done using capitalisation rates, gross rent multiplier or discounted cash flows. Since these measurements are time bound, any selling price must take into consideration, not only selling costs, but also any rental losses arising from vacating the property prior to any anticipated sales. For example, an investment property earns $10,000 in profits from rent annually. Selling costs are $2,000 and losses arising from vacating the premises prior to sales is $3,000. In this case the profits from sales should be no less than $15,000.
In this situation the selling price of the
investment property should generate enough funds to exceed any profit if the property is retained or at the very least to offset any losses. For example, the funds from the sale of the investment property can be used to purchase a property that can generate an annual profit of $10,000. Selling and acquisition expenses are $5,000. Therefore the selling price of the property should be at least $15,000.
Real Estate Break Even Ratio