Sometimes it’s a single situation that prompts real estate investors to sell a rental property, and at others, it’s a combination of factors that leads to the decision. Although buying and holding historically has given investors a clear path to wealth-building, but at some point, selling it off can be beneficial. Knowing when to sell rental property is an important part of any smart investor's strategy. Here are some times it might make sense to sell.
When to Sell Rental Property
The appreciation makes selling profitable.
If you’ve been watching the housing market closely and all the signs indicate that it may be reaching its peak, it might make sense to cash in and take the appreciation. Signs that a housing market is peaking might include:
- Home values that are rising faster than incomes are growing.
- The time on market for resale homes has been short relative to your market.
- Rental vacancy rates are low.
- Job creation is starting to slow, particularly in the sectors that are important to your local economy. Economic drivers by employment sector vary by region, and might be found in manufacturing or professional services.
You want to reinvest in a different property.
Recycling your money by cashing it out from an existing property can make sense in some situations. If you go this route, be sure you check with your tax advisor about setting up a rollover program called a 1031 to prevent your profit-taking from being considered taxable income before you reinvest in another property.
It’s taking too much time.
It's true that selling your rental property might be the right decision for you if it's demanding more of your time and attention than you'd like to give. However, selling isn't the only option in this scenario. When demands for your time exceed your ability to comfortably manage the rental property, consider using a professional management company to help. Realtors who specialize in property management assume the burden of the day-to-day details, along with intermittent issues that crop up, like:
- Finding qualified tenants.
- Conducting walk-throughs, property showings and inspections.
- Collecting and disbursing rents.
- Scheduling routine maintenance and repairs, including cleaning.
See also Turnkey Properties
The monthly income isn’t keeping up with overhead and expenses.
Sometimes it makes financial sense to sell a property when it starts to cost more than it returns. The rental market could be soft or the neighborhood is declining, lowering the property’s return on investment. The typical business cycle lasts six to seven years, and when it starts to dip, it may be time to get out from under a nonperforming property.
Financial needs have changed.
It might be time to take the gains you’ve made on your investment property to fund a large expenditure, like an education for a child or your retirement. Before taking steps to do so, check with a tax advisor who can analyze your financial position and recommend steps to take to offset excessive capital gains.
Depreciation has run out.
One of the advantages of owning real property as an investment is the depreciation you can take over time. When its deductibility runs out, you’ll lose that write-off, which may make holding the property less beneficial financially.
Each of these represent valid reasons for selling a rental property, and doing so can benefit you financially and in other intangible ways. However, remember that the process of selling a property carries significant tax implications. If the time isn’t right for your balance sheet, a property management expert may help you find a way to ameliorate the conditions prompting your need or desire to sell.
Talk to one of our investment specialists to learn how JWB can help you earn passive income through long term real estate investing.