At Green Residential, we’re all for owning as many rental properties as you possibly can. It’s one of the fastest and most predictable ways to build wealth over the long run. However, not every rental property is a “buy and hold forever” kind of rental. There comes a time when you may need to sell the property and move on.
Here’s When You Should Sell a Rental
The decision to sell a rental property isn’t one that you should take lightly. There’s a right time and place.
1. The Numbers Don’t Add Up
The first reason is the most important. If the numbers don’t add up, you need to get rid of the property.
For example, let’s say your expenses on the property are $1,500 per month (including taxes, interest, mortgage payment, etc.) and you’re only renting it for $1,650. This simply isn’t worth it. You’re slaving away to make $150. And what happens if the AC unit suddenly breaks down or your property insurance policy increases? Before you know it, you could be breaking even or even losing money.
2. It’s Stressing You Out
Your rental property might be cash flowing extraordinarily well, but is the emotional cost too much to handle?
- Are you stressed out over your property’s accounting?
- Are you spending too much time maintaining the property?
- Do you hate receiving midnight phone calls from tenants and dealing with emergencies?
If your rental property is adding unnecessary stress to your life, it’s simply not worth it. There are other ways to earn a few hundred bucks per month. Don’t get so caught up in the grind that you forget to take care of yourself.
3. You’re Moving Out of State
It’s a whole lot easier to own a rental property when it’s nearby. There’s something nice about being able to drive by the property and put “boots on the ground.” It makes it easier to deal with issues and build a relationship with your tenants. And even if you hire a property management company to oversee the property, it’s helpful to be in the local vicinity.
If you’re suddenly moving out of state for a new job opportunity or exciting venture, this could be a sign that it’s time to sell the property. You can always use a 1031 exchange to buy another property in the new city you’ll be calling home.
Not everyone will agree with this sentiment – some people actually advocate for buying more out-of-town rental properties as a way of getting access to different/more lucrative markets – but it’s something to think about.
4. Your Property Has Appreciated Significantly
The real estate market has been very, very good to investors who purchased properties five, 10, or 15-plus years ago. Property values have increased dramatically over this time. Some investors in hot markets have seen properties double in value in just 36 months.
If your property has appreciated significantly in value over the past few years, now could be a great time to pull out. For example, let’s say you bought a rental property for $125,000 five years ago and it’s now worth $375,000. You might be able to clear $300,000 or more in equity. That could allow you to put a down payment down on three or four different rental properties and increase your monthly cash flow.
5. You Have a Major Expense
Life happens. Sometimes there’s an unexpected medical procedure. Or maybe you decide you need to go back to school and get another degree. Houses fall apart, cars break down, etc. If you find yourself facing a serious expense that would otherwise require you to go into debt, selling one of your rental properties could be a better option. If it allows you to cash flow the expense and not take on high-interest debt, it’s a no-brainer!
6. When Depreciation Runs Out
As you know, depreciation is one of the biggest benefits you get as a rental property owner. This is a non-cash expense that every rental property owner is able to take. You can either accelerate the depreciation or use a straight-line depreciation (which is the most common method).
With a straight-line depreciation method, the IRS allows you to depreciate the building value over 27.5 years. When you first buy a property, that might as well be forever. But if you’re in the game long enough, 27.5 years eventually runs out. At this point, you no longer get to take the depreciation.
Just because depreciation has run out on a property you own, doesn’t automatically mean it’s time to sell. However, it is a convenient time to do so. You can sell the house and use a 1031 exchange to roll it over into another property and restart the depreciation clock.
7. When You Reach Retirement Age
By the time most savvy investors reach retirement age, they suddenly start receiving mailbox money in the form of their 401k, IRA, pension, annuities, and/or Social Security. This makes the income from a rental property less critical. If there’s another place you can put that equity and allow it to earn more for you, now’s a good opportunity to make a move.
This may or may not make sense for you and your family – so you’ll have to be the judge. If you don’t have a 401k and/or aren’t expecting to earn much from Social Security, you’ll probably want to hang on to the property and use it as a monthly “paycheck.” But, if you’re already pulling a nice income from your 401k/IRA, pension, annuities, and/or Social Security, reallocating the equity inside the house may make more sense.
Let Green Residential Help
At Green Residential, we help Houston real estate investors buy and manage rental property portfolios. We can also help you sell rental properties, if you come to the conclusion that it’s time to liquidate some of your investments.
To learn more about the specific ways we can partner with you, please reach out today!