Owning a rental property(s) is a great way to earn passive income but sometimes, it may be a wise business to sell even when they are cash flowing. There’s no need to hold on to an investment that isn’t acting like one but sometimes it is hard to let go of a property you invested your time and money into. So how do you go about making the right decisions for when you should sell your investment property? There are several factors we at CLTBuyers consider ourselves before making a solid decision. Here are some of our telltale signs.
Examine the Location
The most common mantra that everyone in the real estate business has in their jargon is “location, location, location.” Location is one of the key considerations when looking to see a property’s value.
One of the main things an investor considers in terms of property location is how, in the long run, the area will evolve over the investment period. For example, if a peaceful suburban area gets a noisy factory, its value could potentially diminish.
When the demand for a location has peaked, it could be a good time to sell because the area is no longer attracting new residents like it used to. Keeping a property in an undesirable location means that you may not be able to push rental rates the way you would like.
Look at the Income it is Generating
Income can be looked at from two perspectives.
If the property value has increased just like any other investment, it may be the best time for you to earn some decent cash and enjoy profits. This is great for property investors who buy and hold. A seller’s market is ideal for such kinds of transactions as it is easier to find a buyer interested in your property. You might even find interested parties in a bidding war if the market has low enough inventory.
Setting a metric around the ratio of monthly cash flow can be one interesting way to delineate when it is time to sell. Some investors we know will use a “10-year” rule here. To apply this rule an investor will sell only if they can profit, above what they would retain in cashflow for the next ten years. For example, if a Rental Unit has $250 cash flow a month, it would generate $3,000 in cash flow per year. To meet the “10-Year” rule they would choose to sell if they could generate more than $30,000.
(This approach can be considered a little simplistic as it ignores the growth of Rental Rates and can impact the benefit of appreciation.)
The second way to look at the income issue is when you notice rent rates are dropping. While there are several reasons rent prices may drop in the area, one of the biggest is when the market becomes flooded with rentals. As rents decrease, your bottom line gets affected. It is important to do the math and if it doesn’t add up to meet your expenses, then perhaps selling is the best option.
Another big income issue to consider is maintenance. If for some reason the property has had an extremely high number of maintenance issues those expenses can quickly add up. As properties age, it is only normal for the maintenance levels to increase as well. At some point, it would be better to sell and go invest in property that doesn’t require much upkeep.
You need seed money for your next investment
Financial motivation has two sides to it. If the property taxes are rising, the amount of profit you enjoy on your rental property will be limited. This could be a sign that you should sell. A rise in property taxes means a rise in total property expenses and if your profit is limited, then it may not be worth it.
The best thing to do is opt for a 1031 exchange. You will be able to swap your property for another and in the process, defer taxes. It can be a complicated process, but it is worth all the time and energy you put into it. Look into a 1031 exchange if you are planning to invest in a different property before your income tax returns are due. A 1031 exchange is only possible if you can buy a property of a higher value within 180 days. You should work with a 1031 exchange company to handle the transaction. Such a transaction may cost you up to $2,000.
Life happens. Some families have had to sell their homes because of financial challenges. Selling a home quickly has never been easy. You need someone who will pay you well while at the same time not demanding repairs that will cost a colossal amount. This is where CLTBuyers comes in. We buy homes as they are. Nothing like complicated paperwork and waiting in a listing after doing endless repairs. We aim to give you quick solutions when it comes to selling rental properties.
Selling your investment property should be a well though-out process. It’s important that you work with a professional team that understands why you want to sell, and how you want to sell. You also need someone who understands your sense of urgency. At CLTBuyers, we would be more than happy to help you sell your investment property.
Join our Thursday Office Hours Group to connect with us and get more investing tips.