I often hear people talk about the day they’ll sell their rental property.
That’s a big assumption. There’s no law that says you must sell a rental property someday. You can hold onto rental property throughout your retirement years if it’s bringing positive cash flow.
But there are legitimate reasons to sell a rental property.
So how do you determine the reasons and timing?
You Want to Cash Out
Guessing the market is one strategy—buy low, sell high. This is a favorite strategy of house flippers who traditionally sell after holding the house a year or less.
House flippers are typically not buying property to use as a rental property. That’s usually Plan B if the house won’t sell.
But some flippers have a five-year plan, where they hold a property for five years or so, making improvements gradually while collecting rent.
Then when the house is sufficiently upgraded and if prices have risen in the area, they sell.
You Have Negative Cash Flow
The best way to determine whether your rental property is doing well is by cash flow. Are you making or losing money each month? Determine this by taking your rental income and subtracting all your expenses associated with the property, including a mortgage payment. If you’re losing money, you might want to sell.
Hoping that things change in the future and emotional attachment can cause investors to freeze up, but it’s best to sell a negative cash flow property sooner than later.
Unless there are absolute sure signs of rental prices to appreciate, you shouldn’t speculate that things will change for the better in the future.
But first, consider whether you can tweak the numbers so that you will have a positive cash flow. Do an analysis of what similar rental properties charge for rent in your area. You can save yourself some research time by getting a Rent Estimate report in Rent-O-Meter. If you find you can get more for your rental than what you’re currently charging, consider raising the rent as soon as you can and keep the property.
For a more in-depth look at number crunching, check out this blog post.
You’re Tired of Being a Landlord
Some people like the idea of renting property, but they let their emotions get in the way.
They may become friends with their tenants, for example. If that happens, they don’t make the best business decisions.
They may let tenants make late rent payments, for example, or they may waive their right to make periodic inspections because they feel awkward doing so.
Landlords like this may find—as what happened to me with my first rental—that their tenants have become way behind on rent and have damaged the place beyond repair.
If that happens, it could be time to sell—either that or hire a property manager.
You Need to Sell Your Rental for Relocation
If you manage your own rental properties, it’s easier to do so when you live nearby so that you can pop over when it’s time to inspect and maintain the property or to make or arrange repairs.
If you want or need to move, you can keep your rental property and manage it from afar. You’ll probably need to hire a property manager, though.
Another option would be to sell, especially if you’re moving to a favorable spot for rental property investment. You can buy another property in the new location.
Your Rental Property is in Distress
The rental property you own might be due for some major repairs, such as a new roof or HVAC system.
You might want to sell rather than shell out a lot of money to replace big-ticket items. Or you might have bought an inexpensive property, but now you want to buy a nicer property and collect higher rents. If you decide to trade up, consider doing a 1031 exchange to postpone paying tax on any income gain your receive through the sale.
The Rental Property No Longer Fits Your Plans
You might have bought rental property knowing that an event would trigger its sale. This could be sending a child to college, buying your dream home, or getting ready to retire. A death in the family or a job layoff are other reasons you might want to sell your rental property. But don’t make rash decisions. You might wish to meet with a financial advisor during emotional times in your life. It might make more sense, for example, to hold the property if it’s a good income stream for you.
You should always have a plan as a real estate investor. Maybe your goal was to have sold more properties by now, you’re ready for retirement and don’t want to be a landlord anymore, or you’re sick of having “working vacations” when you take time off work to do maintenance on your vacation rental.
When to Sell a Rental Property
If you decide it’s time to sell a rental property, you can feel better about your decision if you have a solid reason. Note that you can sell your rental property at any time, even with tenants in it. Just make sure you are doing so correctly.
Are you currently dealing with problem tenants, or even good tenants, who are making it difficult to sell your rental property? Is the property in need of repairs, but you don’t have the money or time to get the work done?