In the world of real estate investment, the day-to-day focus is on expansion. It has to be, right? If you’re not using your income to grow your foothold on the real estate market, then you’re not making the most of your profits. It is only natural to assume that if you’re not growing, you’re stagnating.
Table of Contents - When to Downsize Your Investment Portfolio
However, that’s not true. It’s a mistake that’s made by real estate rookies and veterans alike. There are a variety of economic and personal reasons to consider downsizing your real estate portfolio. Here are some reasons to consider selling a property or refocusing your efforts toward a different sector of the real estate market.
Don’t downsize your portfolio lightly
Before you commit to selling off any of your real estate assets, you should take a considerable amount of time to think it over. Canada’s real estate market is a thriving economic sector that has consistently rebuffed predictions of failure to become more and more valuable year after year. Regardless of what’s going on elsewhere globally, or even in the Canadian economy alone, real estate remains a strong investment.
If you have a sizable stake in Canadian real estate, you should consider finding ways to lower your workload rather than sacrifice a source of income that could continue to grow for the next several years.
External economic factors
Given the current circumstances colouring the Canadian real estate market — namely, high unemployment and an ongoing pandemic — learning how to gauge external economic factors is a particularly relevant skill to have.
Pay close attention to feedback from experts. Specifically, local experts proficient in your chosen fields. Those people who have seen the ups and downs of the real estate market can more accurately predict when to take external considerations, like a failing economy or buyer hesitancy, into mind.
For example, over 2021, there are several indications that the Canadian real estate market will continue to be a safe bet for investors, with one big-time exception: retail.
The COVID-19 pandemic highlighted the frailty of Canada’s entire retail market, from shops to bars to clubs. You’d be hard-pressed to find a single real estate expert or veteran who would be willing to put their money into a retail investment. This is a prime example of an external factor that should influence your downsizing decision.
If you're a real estate professional looking for advertising and growth opportunities, click the learn more button below.
The stress becomes overwhelming
Any seasoned real estate investor can tell you that certain sectors of the real estate market are fast-paced. Short and long-term residential real estate investment can quickly turn frenetic. You’ll understand the moment you’re searching for and interviewing new tenants, even as you field tenant complaints and schedule long-term repairs. It can be a juggling act.
If your real estate investment is proving a headache, and you don’t have the profit margin to hire a part-time property manager, consider selling the property and redirecting the funds toward passive investment in an enterprise like a REIT.
A Quick Note: Before you choose to divest yourself of a residential real estate portfolio because of stress, make sure to exhaust all of your possibilities. Even if you don’t have the budget to call in extra help, there are still cost-effective technological solutions, like property management software, that can take some of the workloads off your plate and thereby reduce your stress.
Let’s face it, there comes a time when every real estate investor gets to the point where a life of retirement seems more enticing than continuing to carry on with managing a real estate portfolio.
However, when you decide to retire, you should be careful about how you choose to downsize. It might be tempting to wash your hands of the property or properties and walk away with a sizable check. Depending on the age you are at retirement, that lump sum cash payout may not stretch as far as you’d hoped.
Meanwhile, if you downsize correctly, you can effectively handoff management duties and still retain a small stipend for your expenses.
Look for a family member or close friend who could take over management duties. This will allow you to pay them a starting salary as they learn the ropes. Then, you can transition into passive ownership at your own pace.
If no close relationship exists, there are real estate management companies throughout Canada that will take over the day-to-day management of your property in exchange for a section of the profits. In these cases, you will likely lose governing power on your property.
Not ready to give up governing control? You can hand off the tasks you don’t like to complete. Just as with overall property management companies, there are agencies throughout the nation that will handle specific duties, like the rental application process.
Unless you’re absolutely ready to get rid of your investment property, you should consider an outright sale of your portfolio of your real estate portfolio as a last resort.
You want to try down scoping
You don’t need to keep an eye on your portfolio for too long before you realize that your various investments will experience peaks and valleys of profitability. The more diverse your portfolio, the more likely you are to experience these changes.
If you notice that one particular section of your real estate portfolio is consistently outperforming the others, you might consider a transition known as downs coping. Downscoping is a portfolio tactic that sees an investor sell-off underperforming assets in an effort to focus on higher-performing ones.
For example, let’s say you have your investment money in a REIT, three single-family homes and a commercial property. When you review the numbers, you discover that your single-family properties are significantly outpacing your other two real estate sectors. If you sell your stake in the REIT and unload your commercial property, that’s down scoping.
Since real estate is usually a solid, reliable investment, most investors hang on to their portfolios indefinitely. Unless you fall into one of the above categories, consider keeping your investments and outsourcing the management duties.
Downsizing: Key Considerations
Interested in Rental Property Financing? If so, contact us and we will show you how you can buy unlimited rental properties with great rates.