Purchase Estate Blog

Here is another situation that some claim justifies selling. Imagine you bought a property for $10 million with a 10 percent return. Assume further that market cap rates have gone down from 10 percent to 5 percent. In this case, the property is now worth $20 million. The argument goes that you should now sell the property, and put the proceeds into another property that may be returning closer to 10 percent again.

The downside of this argument is that cap rates will have gone down if the market has determined that this area has better prospects in terms of rental growth, capital growth, and quality of tenants. By selling this property, and buying one where cap rates are higher—around 10 percent—you are effectively exchanging a property with a great location (hence the 5 percent cap rate) for one with a mediocre location (hence the 10 percent cap rate). Once again, I would say, refinance the existing property and use the proceeds to buy a second one as well.