Nine Factors to Consider Before Selling
The decision to sell a rental property should be based on a variety of factors and it’s important to weigh the pros and cons before making a decision. Here are a few factors to consider when deciding whether to sell a rental property and buy somewhere else:
1. Tenant turnover. High tenant turnover can be costly and time-consuming. If you are experiencing a high turnover rate, it may be a good idea to sell the property and invest in a property with more stable tenants.
2. Retirement. If you are nearing retirement, it may be a good idea to sell rental properties and invest in more passive forms of income, such as bonds or dividend-paying stocks, to ensure a steady stream of income during retirement.
3. Personal circumstances. Personal circumstances can also play a role in the decision to sell a rental property. If you are looking to move to a new area, or if you no longer want to be a landlord, it may be time to sell.
4. Alternative investments. You should also consider alternative investments to rental properties, such as stocks, bonds, or other real estate properties that may provide higher returns or lower risk.
5. Scaling. If you want to scale your rental property portfolio, it may be a good idea to sell and buy somewhere else in order to acquire more properties.
6. Maintenance and repairs. Maintaining a rental property can be costly and time-consuming. If the property requires a lot of repairs or renovations, it may make more sense to sell it and invest in a newer property.
7. Market conditions. The real estate market can fluctuate and the timing of your sale can greatly impact the price you receive for your property. If the market is hot, it may be a good time to sell, but if the market is slow, you may want to hold on to your property for a while.
8. Financial performance. You should evaluate the financial performance of your rental property. If the property is generating a positive cash flow and your return on investment is satisfactory, it may not be necessary to sell. However, if the property is not generating enough income to cover expenses, or if the return on investment is low, it may be time to sell.
9. Tax implications. You should also consider the tax implications of selling a rental property. The sale of a rental property may trigger capital gains tax, so it’s important to consult a tax professional before making a decision.
Consider the Market
There are a few different factors to consider when deciding when to sell your rental property.
First, you should evaluate the current rental market for the area and compare it with other potential areas where you could buy an investment property. If the current rental market is not promising, or if there are more attractive properties in other areas with higher returns, then it may be time to sell the property and look for a better investment elsewhere.
Second, you should assess the condition of the property you currently own. If the property is in need of major repairs or renovations, then it may not be worth investing more money into it, and would likely make more sense to sell it and invest in a better property elsewhere.
Third, you should consider whether or not your current property is still generating a healthy return on investment. If the profits generated by the rental are stagnant or decreasing, then selling and investing in another property might be a better option than continuing to own the existing one.
Finally, you should think about how long you plan to keep the property. If you are looking for a long-term investment, then it might make more sense to hang onto the current property and wait for the market conditions to improve.
Sell if Your Property is Cash Flow-Negative
Real estate is notoriously illiquid and costs a great deal of time and money both to sell and to buy. That means you need to run a careful analysis before selling a rental property and buying elsewhere.
If your property is cash flow-negative, then you’re probably better off selling and redeploying your capital elsewhere. A property that loses you money each year is a liability, not an asset. Remember that rental cash flow is not measured by what happens in a “typical” month, but rather by the long-term average of your income and expenses. Most months, you won’t have any repair expenses. Then you’ll get hit with a $5,000 repair bill. Include these irregular but inevitable expenses when you run your cash flow numbers, and include the vacancy rate as well.
Bear in mind the labor expenses of managing properties as well. Whether you pay a property manager or manage the property yourself, it’s still a labor expense (including your time) you wouldn’t incur if you invested passively in the stock market or a real estate syndication. I got so fed up with the headaches of managing tenants, contractors, and property managers that I sold most of my rental portfolio and now invest passively in real estate syndications and real estate crowdfunding.
As you think about investing in a new rental property, consider that the city where you live might make a terrible market for rental investing. The cap rates might be absurdly low (such as in San Francisco), or anti-landlord laws might make it miserable to invest there (such as in LA and Philadelphia). But investing long distance comes with its own challenges, such as finding an effective, trustworthy, and affordable team to help you invest in a distant city. If you aren’t prepared to invest time in building that team, you shouldn’t invest in rental properties.
Sell When the Property Popularity Declines
It’s time to sell a rental property and buy somewhere else if you observe the following:
1. The property is beginning to decline or has already declined its popularity.
2. It’s not giving you the same cash flow, in which case you are losing money instead of making an income.
3. You can not afford the cost of maintenance. Since it’s not giving you enough income, its repair and maintenance will take a toll on you.
4. You found yourself a better option for passive income. If you’ve found a better location and better passive income opportunity somewhere else, you can consider selling a rental property.
5. The value of the property has been appreciated. If your property is now worth more than what you bought it for, selling it and buying another will give you a quick profit.
Bill Samuel is a full-time residential real estate developer at Blue Ladder Development.
Sell While the Updates are Trendy
It makes sense to sell before you expect capital expenditures to come due. Capital expenditures are big-ticket items required to maintain the home. (e.g. roof, furnace, fence, windows).
Another reason to consider selling is the overall condition of the property. For example, a property on Harvard Avenue was renovated in 2015 with new kitchens and bathrooms. It is still within current trends but may not be so in another five years, so it is likely you wouldn’t be selling at the higher end of the neighborhood range five years down the road.
You may also have other investment opportunities that will generate a higher return than you are currently getting from your rental, so it would make sense to sell a rental that is underperforming in your portfolio.
Some rental properties are more difficult to find tenants for than others, so it may be best to sell if your rental property has a trailing vacancy rate higher than 10%. Vacancy not only will cost you money but can also drain your labor sources if you are managing the properties in-house.
Consider Your Current Financial Status
The main factors to consider are current market conditions, rental income, and your personal financial goals. If the current market is booming or you’re seeing a high return on your investment, it may make sense to sell and reinvest in another property. However, if the market is slowing down or the rental income isn’t meeting your needs, it might be time to look for another investment opportunity.
It’s also important to reassess your personal financial goals, as these may have changed since you first purchased the rental property. For instance, if you now want to build wealth or generate more income, it might make sense to sell and find a new investment that fits those goals. Additionally, if the rental property isn’t meeting your personal needs, such as providing enough space for a growing family, it might be time to move on.
Finally, you should also consider any additional costs associated with the sale of the rental property and weigh these against potential gains. If the costs are too high or outweigh any potential gains, then you may be better off keeping your current rental property.
Five Points to Consider Before Selling
● Market conditions. If the local housing market is experiencing a period of strong growth and house prices are rising, it may be a good time to sell.
● Change in personal circumstances. If a property owner is planning to move to a different location, it may make sense to sell their rental property and use the funds to purchase a new home.
● Difficulty managing the property. If the property owner is finding it difficult to manage the rental property, such as dealing with difficult tenants or handling repairs and maintenance, it may be a good idea to sell and invest in a more manageable property.
● Financial considerations. If the rental property is consistently producing negative cash flow and is not generating enough income to cover expenses, it may be time to sell and invest in a more profitable property.
● Property condition. If the rental property is in poor condition and requires significant repairs or upgrades, it may be more cost-effective to sell and invest in a newer property that requires less maintenance. The property may require improvements to reach EPC standards and no longer be profitable or worth the investment.
Sell When the Rental Market is Declining
If the demand for rental properties in the area is decreasing, it may become difficult to find tenants and generate a positive cash flow. The rental market of an area may decline for a variety of reasons such as major employers leaving the area, a high rate of foreclosures, or an oversupply of rental properties.
When the market is declining, rental prices decrease and vacancies may also increase, making it difficult for landlords to generate a positive cash flow from their rental property. In this case, it is best to sell the property and invest in a market with more favorable rental conditions.
Sell to End Landlord Responsibilities
One of the most challenging decisions any real estate investor will face is when it’s time to sell a property and move on. It can be tough to let go of something that’s been a money maker, and you’ll often have some emotional attachment to the place. However, it’s essential to know when it makes sense to sell so that you can focus your energy (and money) on the next investment.
● Being a Landlord Becomes Challenging. Being a landlord can be extremely rewarding, but it’s challenging. You’ll have to deal with tenants and regular maintenance, and you’ll have to handle issues like repairs or renovations that come up along the way. Handling these things can stress out even the most laid-back person.
● The Property Value Has Increased. If the property value has increased, it may be time to sell. You can sell and use the money from your sale to buy another property or another rental. If there’s no need for another property or investment, consider using the proceeds to fund your retirement plan.
● Negative Cash Flow. Negative cash flow is when the rent isn’t enough to cover your mortgage costs. This can be frustrating and feel like you’re losing money. It doesn’t mean there’s anything wrong with the property or its location; instead, there are other factors in your financial situation you need to address before deciding whether or not it’s time to sell.
● Maintenance Fees are No Longer Affordable. Maintenance fees are often overlooked, but they can be a significant part of the total cost of owning a property. They’re what you need to pay to keep your rental property in good condition. If you don’t keep up with maintenance fees and repairs, any arising problems will only worsen and lead to more expensive issues.
When deciding whether or not the time is right for you to sell your rental property and buy somewhere else, it’s essential to consider if your maintenance fees are still affordable.
● Tenants Becoming a Headache. Tenants can be a headache because they are often hard to manage. Some tenants are nice, but others could be nicer. When you own a rental property, it’s essential to work with your tenants so that they pay their rent on time and keep the property in good condition.
If you have been working with troublesome tenants lately, selling the property could be considered.
● Unfortunate Life Events. If you have a sudden and unfortunate life event, selling your rental property may be the only option. In the case of death in the family, a divorce, illness that requires long-term care, loss of a job, or other major life events, suddenly selling your rental property can be one of the only ways to recover financially.
Excessive Repairs and Maintenance
There are several reasons why a landlord may consider selling a rental property and buying another one. Some of the most common reasons include:
● The property is no longer generating enough income. If the property is consistently vacant or if the rent is not covering the costs of ownership, it may be time to sell.
● The property requires excessive repairs or maintenance. If the property requires significant repairs or maintenance that will be costly, it may be more cost-effective to sell and invest in a newer property.
● The rental market has changed. If the rental market in the area has changed, such as a decrease in demand or an increase in competition, it may be time to sell and invest in a property in a more favorable market.
● The landlord is ready for a change. Some landlords may choose to sell a property simply because they are ready for a change and want to invest in a different property or market.
Ultimately, the decision to sell a rental property should be based on a careful analysis of the property’s financial performance, the local market conditions, and the landlord’s personal goals.
This is a crowdsourced article. Contributors' statements do not necessarily reflect the opinion of this website, other people, businesses, or other contributors.