Investment Analysis

Setting Up an Investment Base Camp

How to build a model for the hold-versus-dispose decision.

A real estate investor, after acquiring an asset, must constantly make decisions during its ownership cycle. Issues such as property management, tenancy, and capital expenditures require attention and  careful consideration.

Throughout ownership, an investor must always weigh the benefits, costs, and opportunities of holding onto or disposing of a property. Saying “buy low and sell high” sounds like a recipe for success, but it's nearly impossible to time the market to sell an asset in its most favorable conditions.

There is a process, however, that can help investors create a decision matrix to fully understand hold and dispose alternatives, along with the benefits of each avenue.

First, the investor must understand what is foregone by holding an investment. In other words, if the investor sells for cash, how much could then be placed elsewhere? This cash flow is the investment that remains in the decision to hold rather than sell the investment. To accurately judge its performance from this point forward, the investor must consider this amount as the initial investment.

Investors often make the mistake of judging a property based on its original investment, without consideration for the change in value over time. For example, say an investor acquired a tract of land for $500,000 cash 10 years ago that is now worth $3 million. The investor must consider the sale proceeds after tax from a cash disposition as the amount invested when deciding whether or not to continue owning that asset. Rather than having $500,000 in the land, the investor should make decisions based on $2.5 million as the investment amount. This calculation is the sale price minus the taxes on the long-term capital gain.

This alternative-use money is called the “investment base,” because it is used to examine your options to sell the property. Every investment alternative has an investment base. To quantify it, ask the question, “If someone chooses this alternative, how much money is that investor giving up the right to use in another investment?” This investment base can then be used to measure an investment's performance from that moment forward.

Investment Base for Hold Alternatives

The investment base of the continue to “hold as is” alternative is the sale proceeds after tax realized if the property were sold for cash at the decision point.

This investment base is calculated as follows:

The money left invested becomes the cash flow for the end of year zero. Both the projected annual cash flows after tax and the projected sales proceeds after tax at the end of the holding period are the future after-tax benefits received from continuing to own the property. The investment performance of the “hold as is” alternative can then be measured by calculating the after-tax internal rate of return (IRR).

Another hold alternative is to retain the investment but to refinance and place some or all the refinance proceeds in another investment. This would reduce the investment base in the “hold and refinance” alternative.

This figure is calculated as follows:

The money left invested after pulling out the net loan proceeds of the refinance becomes initial investment. The after-tax benefits received are: 1) the projected annual cash flows after tax with the new loan in place and 2) the projected after-tax sales proceeds once the new loan balance is paid off at the end of the holding period. The investment performance of the “hold and refinance” alternative can then be measured by calculating the after-tax IRR.

Investment Base for Dispose Alternatives

To calculate the investment base of a potential sale and reinvestment in a new property, first calculate the available sales proceeds after taxes from the current investment. The investment base for the “sell and buy” other real estate alternative then will be the sales proceeds after taxes from the current property plus any cash added to purchase the other real estate investment, less any cash taken out from the sale of the current property.

The “sell and buy” investment base is calculated as follows:

The investment base for an exchange into the newly acquired property real estate is similar. The sales proceeds after taxes from the sale of the current investment plus any cash added in the exchange, less any cash taken out during the exchange is the investment base for this alternative.

The “sell and buy” investment base is calculated as follows:

In addition to IRR, these hold-versus-dispose alternatives can be compared using net present value and capital accumulation. The future capital accumulation and the net present value for each alternative can be calculated using the projected cash flows and sales proceeds from each alternative and then applying the appropriate reinvestment or discount rates.

Editor's note: This article was adapted from the course “Disposition Analysis for Commercial Real Estate.”  In addition to a discussion of investment base, the course explores numerous sample problems and case studies to hone hold-dispose analysis. For more information, visit

Joseph A. Fisher, CCIM

Joseph A. Fisher, CCIM, is the president of Fisher Investment Real Estate in Indianapolis. Fisher has been a CCIM Institute instructor since 1980 and was CCIM Institute president in 2007. Contact him at


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