WHAT IS HOLD-SELL ANALYSIS?
First, what do I mean when I talk about hold-sell analysis in real estate? Essentially, the hold-sell decision is the decision whether to continue owning a property, or to sell the property and reinvest the proceeds in an alternative opportunity. This is a decision process every owner of income-producing real estate must go through at some point.
Many professional real estate asset and portfolio managers perform this analysis on a yearly basis, so as to optimize the overall returns of their respective portfolios and beat their target benchmarks. Thus, savvy real estate owners are regularly asking, is now the right time to sell or am I better off holding?
The analytical process one goes through to make this decision is called Hold-Sell Analysis. It involves analyzing and comparing the two choices using real estate analysis tools such as a real estate discounted cash flow model.
HOW HOLD-SELL ANALYSIS WORKS
Hold-sell analysis involves comparing a handful of relevant metrics (e.g. IRR, Equity Multiple, etc) for each of the two scenarios side-by-side. And then making a decision, in part, based on the results of that comparison.
You run a 10-year DCF on the prospective apartment opportunity and, based on the Rs 30,000,000 purchase price, you project that it would return a 12% levered IRR and 2.00X equity multiple over the next 10 years.
You then calculate the levered IRR and equity multiple for your existing apartment complex as if you were to own it for another 10 years, using its current value (30,500,000) as the time zero cash in your DCF. The result is a projected 10% levered IRR and 1.80X equity multiple.
Based on your analysis, you conclude it is more accretive to your real estate portfolio to sell the apartment complex and reinvest it in the alternative apartment complex.
PERFORMING HOLD-SELL ANALYSIS USING THE SUVARNA CONSULTANCY FINACIAL PLANER
So what are the steps for using the Financial planer , a real estate DCF, to perform this analysis?
- Model the alternative investment opportunity first using the SUVARNA CONSULTANCY FINACIAL PLANER , making note of the most salient metrics to your decision.
- Model the existing investment using the SUVARNA CONSULTANCY FINACIAL PLANER , setting the “acquisition price” to the amount you could sell the property for today (net of selling costs). The reason you set the acquisition price to what you could net from selling the property today, and not what you originally paid for it, is that in the hold scenario what you could sell it for today is your opportunity cost. Or in other words, the cost of not selling the property.
- Make sure the hold period and financing terms (i.e. LTV, interest rate, term, etc) are identical between the two modeling scenarios.
- Compare the return metrics to help make the final decision. Remember, there is more that goes into the decision than just the quantitative metrics. The results of your analysis are just one data point for you to use to help make the decision.
Allow me to illustrate this analysis using a hypothetical example Contact us now