“When should I sell my rental property?” is a question most landlords seem to ask themselves all the time. Rentals exist to generate income, typically passively.
So there definitely comes a point when either the landlord outgrows the property (i.e. it does not generate enough income) or it becomes a financially unviable business venture for him and he needs to sell.
When Should I Sell My Rental Property? (UPDATED 2018)
Here is everything you need to know about when and why to sell a rental property in 2018:
What makes a good real estate investment?
There are a number of reasons that make a property a good real estate investment. Yes, making money is an essential part, but if your rental units do not check all three of the boxes below, then it might be time to consider letting them go.
1. You Make Money Every Single Month
This is the most important aspect of a good real estate investment property. You should end every single month in the black. Yes, that's right. Every single one. If you do not own your property outright, the payments from your tenant should cover your mortgage and also put extra money into your pocket.
After all, your tenant is not simply babysitting your property. He lives there to make you money!
2. It Is In An Area of High Demand
This is another essential quality of a good real estate investment. You want all of your rentals to be located in an area with a high demand for them. This is because if (when!) your current tenant decides to move out, you do not want to be left without a tenant for too long.
If your area is a competitive one, you can easily secure another income stream. But if it's not, your income and the viability of the property will be solely dependent on the will of the tenant.
3. It Is Easy to Manage
This is a bit of a cost to benefit analysis quality. Is the amount of money you are making from managing your property worth the time and effort that you are required to invest into it?
If you move out of state, or even just a few hours away, is the trip back to handle lockouts and toilet leaks worth it? What about the costs of a property manager if you can't be there in person?
The less involved and low key the management of a rental can be, the higher the value of the rental.
When Should You Consider Selling Your Rental?
1. When You Stop Making Money
This might seem obvious, but the first months that you come up short, you might be tempted to stick it out and see how things end up. Don't do this. If your rental is consistently setting you back every single month, then it is time for a change. You should consider selling the unit or, if you are able to, moving back into it to live.
2. When You Become Remote
As we mentioned, if you live too far away from your units, they can quickly become a pain to manage. Because of this,we highly recommend thinking about selling your rentals if you plan to move more than a 30ish minute commute away from them.
For example, if you live in Texas but are renting units in New York, the likelihood of keeping management costs reasonable is extremely low. Logistically, for the average landlord, this would be a nightmare.
3. When the Cap Rate is Bad
The cap rate is the term we use to describe the income and expense to the value of the home ratio. In an ideal situation, the cap rate would be between 5% and 10%. If you are beginning to lose money on a rental or plan to move far away from it, consider revisiting the cap rate equation.
This is because there are many things that can change a cap rate throughout your time as the owner. Property taxes can rise. The competitiveness of the rental market in the area could decrease. Maintenance and utility costs could also be drastically higher than expected.
To discover your cap rate, you can follow this simple equation:
Your annual monthly expenses – the annual income from the property / the unit's current fair market value.
If the number you get is less than 5%, it is definitely time to sell your rental property.
4. When You Exceed the $250K / $500K Tax-Free Profit
Uncle Sam allows investors to pay zero capital gains tax on the first $250K in profits for individuals. For married couples, it is the first $500K in profits for your primary residence.
If your rental units cause you to hit these tax-free limits (and you're still eligible for the benefits because you've lived in your home for two out of the last five years), then it could be time to buy a new place in a cheaper part of the country with potentially more upside, i.e. more of these benefits.
5. When You Have a Major Life Event
Sometimes things happen in our lives that cause us to really shift the way we think about things. Maybe your family is expanding, or it has experienced an untimely death. Things like major accidents, unexpected layoffs, and big moves are also things that can warrant property reevaluation.
Sometimes, keeping your rental properties active amidst these events can be a real lifesaver. This is because the passive income that they provide might allow you to take significant time off of work or simply cover your expenses until you find a new job.
But usually, the financial and logistical commitment that properties require is too much to keep up with amidst big life changes. Because of this, people like to sell.