Knowing how to determine the best time to sell investment property is crucial to real estate investing because real estate investors want to ensure that their investment is functioning profitably.

We can’t prescribe a formula for selling profitably, but we can show you five factors that generally motivate real estate investors to get out of one real estate investment and into another.

1.    Incurable Problems If you’re encountering problems you can’t cure like a deteriorating neighborhood, an outdated building requiring major expenditures, or a string of continual vacancies due to an over saturated rental market, it might be time to sell.
2.    Changes in Goals or Situation Any number of logical issues could spring up that would cause a real estate investor to sell investment real estate. The decision to retire, for example, or maybe some change in their life has altered their investment goals. Whatever the reason, real estate investors must not overlook the effects of capital gains tax and sell hastily.
3.    Profit The idea that someone might be willing to pay a substantial price for your rental property and therein make you a significant profit might cause you to sell. Again, be sure you know the affect of capital gains tax before you sell.
4.    Loss of Depreciation Benefits In many cases, real estate investors enjoy “tax-free” income thanks to the fact that depreciation allowances outweigh cash flow. When profits increase significantly, however, and the total return begins to outweigh depreciation, more of the profit is subject to taxation each year. Whereas you might have paid zero tax during the first three years of ownership, for instance, you might now owe tax and decide that it’s time to invest in another property.
5.    Increased Equity A proper concept of equity is where many investors make a common real estate investing error. They fail to recognize that equity is a combination of appreciation and mortgage principal reduction, not merely the initial cash invested, and as a result, are unaware that their rate of return is diminishing each year. Those mindful of current property equity–that after the first year initial investment is no longer the equity–often make decisions to sell when returns get too low.

There are three basic methods used by appraisers to determine the fair market value of income producing real estate that real estate investors might find helpful when buying investment property. In this article, we’ll discuss how each one works and then show you how you would estimate the market value of a subject income property based on each method.

Income Approach

The income approach method for determining a property’s market value is where you use the return you desire from your cash investment and then capitalize that percentage by the net operating income being produced by the property.

Let’s say, for example, you desire a 8.5 percent return on your investment and you estimate the net operating income (NOI) for the subject apartment to be $38,500. Here’s the computation:

$38,500 / 8.5 = $452,940

You would be willing to pay $452,940 for the apartment complex based upon its income stream and your desired return on investment.

Market Data Approach

The market data approach makes use of a list of properties comparable to the subject property and determines a property value-price per unit. In this case, these comparable properties should be in similar areas, with similar apartment sizes, amenities, appearance and rent structures, and should all be buildings that have sold recently.

You would then divide the prices at which each building sold by the number of units in each apartment complex to determine an average price per apartment to use as a multiplier. The average price per unit is then applied to the subject income property.

Let’s say, for example, you create a list of six comparable apartment complexes in the local area and determined that they sold for an average of $60,000 per apartment. By multiplying the $60,000 average unit price times the number of units in the subject property (we’ll assume there are seven), you arrive at market value of $420,000 based on the market value approach.

Cost Approach

The cost approach method estimates what it would cost to replace the entire apartment complex. In other words, what would it cost to buy the land and build a building identical to the subject property?

First, you must determine the land value. If a study indicates comparable land is selling for $10 a square foot and the subject property is on a 100 x 200 foot lot or 20,000 square feet, then the land is worth $200,000.

Second, you must determine what it would cost to replace the site improvements such as the parking area, lawn, shrubs, trees, etc. You determine it would cost about $30,000 to replace them.

Finally, you must compute what it would cost to duplicate the building. If the subject apartment complex has seven one-bedroom apartments of 600 square feet each or a total of 4,200 square feet, and it would cost $60.00 a square foot to build, then the cost of a replacement structure will be $252,000.

The total cost of a new building is $200,000 + $30,000 + $252,000 or $482,000.

Okay, but the subject income property is several years old, so we must establish a comparable by figuring a depreciated value on the $252,000.

In this case, assume the subject income property has depreciated 20 percent or $50,400. This would leave a depreciated value for the building of $201,600. To this amount, add the $30,000 in site improvements and the $200,000 land value, giving a total market value using the cost approach of $431,600.

Estimate of Market Value

1. Income Approach:
NOI of $38,500 capitalized @ 8.5% = $ 452,940

2. Market Data Approach:
7 Units @ $60,000 per unit = $ 420,000

3. Cost Approach:
Land of 20,000 square feet @ $10.00 square foot = $200,000
Site Improvements = 30,000
Duplicated Building (less 20% depreciated value) = $201,600

Cost of property replacement = $431,600

4. Final Estimate of Market Value = $440,000

It should be noted that the final line on the analysis is an estimate of market value. How did we arrive at it? We correlated all three of the appraisal methods and simply made a judgment by putting a slightly heavier emphasis on the income approach. Other real estate investors might arrive at a different estimate of market value, but you get the idea.

With the raising cost of home construction, mobile home parks have become more populated with retirement-age people and young couples and therefore a sought-after form of real estate investment. In many cases, a mobile home has become a valid alternative to a sticks and mortar home.

Moreover, mobile homes are not your daddy’s mobile home. In fact, most of them are no longer “mobile.” Once placed in a mobile home park, they are tied down, skirted with decorative concrete block, landscaped and have patios installed. In other words, they become almost as permanent on the site as a conventionally built home.

Okay, just in case you want to invest in a mobile home park, let’s see how mobile home park ownership differs from other forms of real estate investments and why mobile home parks have become popular in real estate investing circles.

1. Improvements are minimal - Compared with most other investment real estate, the improvements in a mobile home park are minimal. Other than the streets and possibly a recreation and laundry facility, on site improvements mostly consist of the mobile home pads (or sites) which have water, sewer and electricity, and a concrete slab for the patio area and tie down rings to anchor the home to the ground.
2. Good income opportunities - There are several sources of income potential for a mobile home park owners in addition to the pad or space rental. The park owner can realize a handsome profit by selling new mobile homes when a park has vacant spaces, for instance, or by acting as the selling agent and charging a fee to tenants who decide to sell their home and move. The park owner can also bring in additional profit by selling mobile home accessories such as skirting around the bottom of the home, fire extinguishers, smoke alarms, or from the coin laundry facilities.
3. Operating expenses are minimal - Maintenance requirements are typically limited to the common areas such as swimming pool and clubhouse or, for the sake of appearance, landscaping. Some mobile home parks even include spaces where each space has individual water as well as electric meters, and tenants pay for these services.

Bear in mind that mobile home parks are not travel trailer parks. Travel trailer parks are a completely different type of real estate investment that caters to travelers with motor homes, house trailers and campers and compare, management-wise, with a motel type of investment where renters are coming and going continuously.

Mobile home parks are like subdivisions and many knowledgeable real estate investors are turning to mobile home parks as a real estate investment because they are profitable and easy to manage.