Rental properties offer real estate investors long- and short-term profits. From the start, you can charge rent that will cover the cost of the mortgage, expenses, and taxes while producing a steady stream of income.
Owning a rental property also yields long-term results. At some point, you will sell your property and can earn profits on the sale. The question is, when is it the best time for you to sell your property to see the best results from your investment?
There is no clear-cut answer for knowing if and when it is time to sell a rental property. There are a number of factors to consider that can be deeply personal to the investor. Here’s a look at some of the reasons it might be time for you to sell your rental property.
The property no longer earns income
Like any investment, there’s no guarantee a rental property will earn an income. Unfortunately, some rental properties will never produce an income, and others will stop earning a return over time. Keeping track of the money coming in as it compares to expenses over time will help you understand your situation.
If your rental property income is in the red for a few consecutive months, it may not be time to put your house on the market. As with all investments, there are ebbs and flows, and it is normal for a property to be vacant from time to time.
But, if you find yourself with a high rate of tenant turnover or you are unable to charge rents high enough to yield an income — or cover your expenses — it’s probably time to post the “For Sale” sign and list the property.
The property value has appreciated
As an income property owner, it is important to follow the local real estate and rental markets in your area to know when it’s time to stop holding and start selling. For the best results on your investment, you want to sell your property if the income from the sale in the short term exceeds the long-term rental income.
To find out which option is more likely to give you the best results, you need to calculate your return on equity. You can calculate your return on equity by dividing your annual profit in rent by your accrued equity.
If you discover that your property is appreciating at a rate faster than your profit from rents, it might be time to sell.
For a second opinion, you can consult a trusted local real estate expert. They can help you determine which path will give you the most bang for your buck. Find a top-rated local agent in your area today for more advice.
You want to pursue another investment opportunity
Even if your rental property is earning a strong income, there may come a time when another opportunity presents itself. Perhaps it is a property in an up-and-coming neighborhood, or maybe it is one that is in high demand for renters. Whatever the reason, selling your current rental property can free you up to pursue this new opportunity.
There are other benefits of selling one investment property for another. By taking advantage of a 1031 exchange, you can increase your buying potential on the income you earn from the sale of your property.
Through a 1031 exchange, homeowners can defer paying taxes on the capital gains of selling a property by investing the income in like-kind property. Say you bought your first property for $100,000 and are able to sell it for $200,000. You can use that $100,000 difference as a down payment for your new property as long as you close within 180 days.
As with all tax codes, there are stipulations and rules to follow. Do your research on the different types of 1031 exchanges, from traditional to improvement, to find out if it is right for you.
You no longer want to invest in real estate
Managing rental properties also takes considerable time and effort. In addition to maintaining the property, you are responsible for renting to tenants who will pay the full price on time — and if they don’t, you are responsible for evicting them. You are also on the hook for any related expenses, including taxes and unexpected repairs.
If you are no longer able or interested in keeping up with your responsibilities as a landlord, it’s time to move on. One word of caution: Avoid selling your property within one year of purchasing.
The income earned from the sale of a new home is considered a short-term capital gain, and you will be taxed at a higher bracket. Homes sold after one year are considered long-term capital gains, which are taxed at a lower rate. The difference in that tax rate could save you thousands of dollars.
You need the money
Life happens, and you may find yourself in need of a significant amount of money now rather than waiting for the long-term returns on an investment. Whether you have a child who has just been accepted to a prestigious college or are facing a mountain of medical bills, the sale of your investment property could be just what you need.
Before you sell your home for fast cash, make sure this is the best course for you and your financial goals. Based on how much you can make for the sale of your home, it might make sense to take out a loan to cover these unexpected expenses instead. Check out the interest rates on student loans or medical credit cards to see if those are a better option to help you achieve your long-term goals.
The choice is yours
Ultimately, when it comes to owning a rental property, the choice is yours. Real estate is often considered a buy-and-hold investment. Based on historical trends, your property should appreciate nicely over time.
By keeping your eye on the real estate market and your investment’s performance, you can get the best bang for your buck and come out on top.
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