For investors, owning rental property can be your ticket to financial freedom. It’s a great way to generate long-term returns in the form of cash flow and in some cases, appreciation. But as great as rental property can be, sometimes there comes a point when you might want to think about selling.
As an investor, one of the most important things you can do is to know how to spot a good deal and when to purchase. Another important part of owning rental properties is knowing when to sell. Unfortunately, it’s not always clear if you should continue to hold or sell. Often, there are a handful of variables you’ll want to consider when weighing up your decision. This includes things like the local market conditions, your property in question, the returns that you’re generating, and of course, your big-picture goals.
One thing you might be wondering is whether your rental is still a good investment or not. In this article, we’ll look at some features of a good rental as well as some signs that it may be a good idea to sell. See for yourself what the best option is for your situation.
Some Features of a Good Rental:
First up, let’s take a look at some signs that you have a good rental.
- You Have Positive Cash Flow
If your property is generating positive cash flow, then that’s a sign that it’s a good rental. Rental investments should pay for themselves. That means they should generate enough income to cover all of the expenses and pay you at least a few hundred a month in income as well. If you’ve found a property that does that, you’ll want to hang onto it: it’s a keeper!
- It’s Located In a Good Market
Next up, if your property is in a good market, one that’s seeing steady economic growth with good prospects for long-term development, then you may want to think about holding onto it.
- You Have Good Tenants
If you have good, long-term tenants who have been in your property for a while now, then you may want to let this factor into your decision. With long-term occupants in the rental, paying the rent on time, every time, abiding by the terms of the lease and looking after the property as if it were their own, then you’re in a good position as a landlord. Vacancies are expensive, and having good tenants in your rental is worth a million.
- The Property is Consistently Rented
If you don’t have long-term tenants, is your rental consistently rented? Do you find that you end up having minimal downtime in between your tenants and that you have minimal vacancies per year? These are all good signs that you have a good rental.
- The Property’s Increased in Value
Finally, if your property’s increasing in value, then you may be tempted to sell. And selling is indeed an option. However, you’ll also want to consider whether you’d be better off holding onto it longer, as the price continues to climb. It may be an idea to hold off selling until you need to, rather than doing it early on as you’ll be able to benefit from the price climbing even higher, assuming that you’re located in an area where it’s likely to do so. You can get an idea about housing prices by looking at price increases over the last ten years or longer and seeing what the average annual increase is.
Signs That It May Be Time to Sell Your Rental
Now, here are a few things to consider, signs that it may be time to sell your rental.
You’d Like to Cash Out
One of the great things about owning rental property is that it gives you options. You can buy a rental property, and hold onto it until you retire, renting it out for additional income. Then, when it’s time to retire you have options. You can hold onto the property, and continue to rent it out for a steady and predictable income each month. Or, you could cash out, and use the proceeds from the sale to aid in your retirement. It’s up to you what you do, but the beauty of owning rental properties is that you get to decide.
You No Longer Want to Be a Landlord
Being a landlord isn’t for everyone. It comes with a lot of day-to-day requirements of managing a property, emergency phone calls, and other taxing responsibilities. While you may have had the best-laid plans when it came to getting started, it takes a lot to know when it is time to cut your losses. This can be especially true if you are a first-time landlord and it has turned out much differently than you were expecting.
Still, if this sounds like you, know that there are options available to you if you’d like to step back from overseeing your rentals, but would like to still keep the income coming in each month. One option is to enlist the help of a property manager, something that many landlords today do. Outsourcing to a property manager allows you to outsource all of the day-to-day tasks that are involved with being a landlord and focus on other things, while still generating an income from your properties.
Wondering if being a landlord is for you? Consider giving: Being a Landlord - The Good, the Bad, and the Ugly
Your Property Value Has Increased
If your property has performed well and the appreciation value has increased, you may be thinking about selling. If you bought a property with the long-term plan of eventually selling and your property value has now increased, now might be your opportunity to sell. However, keep in mind that holding onto the property long-term and continuing to rent it out means a steady income into the foreseeable future, something that you will sacrifice if you sell. While selling will give you a sudden influx of cash, you’ll want to assess the pros and cons of selling now as opposed to holding it, and decide which option will work best for you.
Your Property Value is Going Down
On the other hand, if you own a property in an area that’s seeing declining property values, then it might make sense to offload it. This could be an especially good idea if you’re planning to put the proceeds into another property. If this is the case for you, you’ll want to look for an emerging market, a market that’s up-and-coming, where rents and property values are likely to increase as well. Learn more about spotting emerging markets in your free guide: How to Find and Buy the Perfect Investment Property.
If you find another market that is promising and has more potential than the one you are currently investing in, then selling and purchasing in that area might not be a bad move. However, it’s important that you do your research to ensure that the market is up-and-coming, with signs of strong future growth. You’ll also want to run the numbers to make sure the property in question checks out as well.
Tip: Take a look at the Renters Warehouse Research Center to see market data that can give you the inside scoop on what’s happening in a region. See housing price changes, population changes, employment information, and more. Get the information that you need to invest.
You Can’t Keep Up With Maintenance
A big part of owning a rental unit is keeping current with the maintenance and repairs. Once you start falling behind, you can find yourself with even more expensive repairs that need to be done. While maintenance costs can be unpredictable, a good guideline is to plan to spend roughly 1% of the property’s value on maintenance each year. So if the property is valued at $250,000, you’ll want to set aside $2,500 each year for maintenance. If you’re finding it a challenge to keep up with maintenance and repairs, then you might be tempted to sell. However, keep in mind that maintenance and repairs are something that can be entirely outsourced. By enlisting the help of a good property manager, you’ll be able to outsource the job of maintenance entirely, allowing you to focus your time and attention elsewhere.
Your Property’s Not Generating the Returns That You’d Like It To
Not all properties are created equal. Some properties make much better rental investments than others. In some cases, a rental may not be generating returns that are in line with your investment strategy. In these cases, it might make sense to think about selling your property and investing in something else.
You’ve Found Another Investment
Maybe you started out with one rental property, testing out the waters to see if owning a rental is right for you. Over time, you may have expanded your knowledge of rentals, and discovered that with careful research and market analysis, you’ll be able to spot high-performing rentals that generate better returns. If this is the case, you might have your eye on another property. By selling the property that you have now, you’ll be able to roll the proceeds into another purchase. This could be a viable option. With a 1031 exchange, you can defer capital gains taxes if you “exchange” one property for another. This exchange allows you the flexibility and freedom to exchange your investment properties without having to worry about being taxed heavily at the time of the sale. Be sure to consult with a good CPA who will be able to inform you how you can execute this strategy and whether you’d end up owing other taxes if you were to sell.
How do you find a good investment property? Consider reading: Spotting a Good Investment Property, for some tips on just that.
The Expenses Are Too High
Finally, another reason you might consider selling your rental is if the expenses are too high. When assessing a potential property, first-time landlords often underestimate how many expenses there are. It’s important to average out your ongoing expenses, including taxes, insurance, interest, and more, along with inconsistent expenses such as vacancy rates and repairs, things that can quickly take a bite out of your profits.
If you find that your property’s expenses are too high, then you’ll want to take a look at other similar properties in your area to see if you could raise the rent. Increasing the rent, even by a small amount, can often help to offset many of these other costs. See: Beating Inflation: How to Raise the Rent?
So should you sell or hold onto your property longer? That depends! On the market conditions, your property in question, and the returns that you’re getting. It also depends on your investment goals and strategy and whether the property is helping you to reach them. While in some cases, it might make sense to sell your property, in other cases, you may find that you have other options available that mean you don’t have to sell.
If you like the returns that your property generates, but are finding that it’s too taxing on your time, then you may want to consider outsourcing much of the work that’s involved with the rental instead. Sure, it’ll cost you each month in terms of property management, but if it allows you to keep your rental property, and continue to generate cash flow each month, not to mention, experience long-term appreciation, then it’s one cost that’s worth considering. See how you can get started with property management today.
Thinking about selling your property or portfolio? If your portfolio is managed through Renters Warehouse, it’s easy to do. Just click the Sell It button, and get your listing submitted to review. A representative will get in touch to help you finalize things and your portfolio will be placed on the site for sale. It really is that simple.
Note: Keep in mind that the above advice is intended to inform and guide. It is not meant to serve as advice in place of an accountant. Before selling your property, it’s important to speak with a CPA who will be able to inform you about your tax obligations should you choose to do so, and inform you whether a 1031 exchange is a viable option for you.
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