Unlike long-term relationships, parting ways with an rental property should not evoke sentimental feelings. Consider this strictly business, even if you want to sell a house you lived in for years. This is about your financial health. To paraphrase the late Kenny Rogers: you got to know when to hold and know when to walk away.
But how do you know when it’s the right time to sell a rental home? Here are 5 considerations to help you make the best decision!
Percentage of Income Stream
Wealth management professionals constantly preach the importance of diversifying your income streams. For example, the Financial Samurai recommends having at least three or four distributed income sources. If real estate comprises more than half your net worth, the safe plan is to sell and rebalance the load.
Changing CAP Rates
Investment property owners often speak about “CAP rates” (or capitalization rate) for their rental properties. Taken as the net operating income divided by the current market value of the property, the CAP rate determines a risk level for a given property. There are myriad considerations that factor into what is an “acceptable” risk for an owner. However, if a CAP rate increases drastically, keeping the rental properties come with increased risk. It helps have a clear risk tolerance at the outset as a benchmark.
Is There Profitability?
Beyond following CAP rates, a property’s projections should stay in the black. When you first made the decision to purchase or begin renting existing property, you needed to determine the home’s profitability.
When a neighborhood has plans to add new rental units, the additional availability of housing will inevitably drive rent rates down. Add planned tax hikes for property owners to a market flooded with new housing, and profitability will most certainly suffer. After accounting for ongoing expenses and local market forecasts, does the property continue to be a net positive investment?
The Money Pit
Every real estate investment requires a certain amount of upkeep and repair. Appliances and carpeting wear out, HVAC units need replacing, roofs require new shingles. You may own more than one investment property that will face major repairs in the near future. Selling one can lessen the impact on your budget. Naturally, we’re not suggesting any underhandedness; of course, you must be upfront about necessary repairs.
Regardless, a basic inspection will uncover repair recommendations for a potential buyer. But that buyer may not have the same maintenance rotation issues in their portfolio.
Should vs. Need
In truth, all the contemplation in the world means nothing if you find yourself in actual need of actual liquid funds. If you have or in the near future will have a pressing need for funds, projections mean little. Depending on the need, it may make more sense to sell investment property than to go into debt. This is especially true in today’s volatile economy where cash is king.
So, Is It Time to Sell Your Rental Property?
Still not sure whether you need to stay or sell? Our rental management experts can help!
Through in-depth analysis of property value and rental rate trends in the local area, our experts can offer detailed information to inform your decisions. If you decide to sell, we can help you list and sell your property quickly while gaining maximum profits.
The Realty Medics have years of knowledge and experience in investment sales. As a full-service brokerage, we can support you as much (or as little) as you need. Interested in learning more?
Contact our investment professional by calling 321-218-4753 or by completing our online form: https://www.therealtymedics.com/homes-sale/investment-properties.
