As a real estate investor, the question of when to sell a rental property tends to pop up regularly. Do you try to time the market? Is it better to buy and hold long-term? Should you do a 1031 exchange? While each investment strategy prioritizes different factors, key technical or personal signs may indicate it's time to sell your rental property. Read on to understand what you should consider.
Does It Ever Make Sense to Sell a Rental Property?
While it's true that if you buy and hold for long enough, almost any property will appreciate. If you hold your rental property for 50 years, its real cash value adjusted for inflation will likely be more than it is today.
However, there are other factors to consider, such as short-term cash flow, time demands for managing a rental property and other investment opportunities. Selling a rental property in any of these cases might make sense.
How to Know When It's Time to Sell a Rental Property
How do you know when to sell a rental property? Below, you'll find eight scenarios where it can make sense to sell a rental property.
Being a Landlord is too Demanding
Time is a valuable asset of an investor. If you've chosen to be the property manager for your rental property, the time demands may not be worth the returns. You might want to sell if you struggle to keep up with the duties of a landlord.
Consider the number of hours weekly or monthly required to maintain and manage the rental property and what that comes out to be in terms of hourly compensation for your time. Likewise, consider the cost of hiring a property manager and whether the rental property would still make financial sense.
Financial Considerations
Your money should be making more money. If you have significant funds tied up in a property without adequate cash flow, it might make sense to sell the rental property. Consider financial factors such as market conditions, cash flow, need for liquidity and return on investment (ROI) when deciding whether to sell a rental property.
Property Performance Evaluation
It's important to regularly evaluate a property's performance to determine profitability and long-term returns. For this, you can look at regional vacancy rates and rental demand compared to your property's rates. Likewise, considering maintenance costs, potential renovations and repairs can help determine the right time to sell.
Life Circumstances
A major change in life circumstances could mean it's time to sell your rental property. Job relocations or income, retirement plans or changes in the real estate market may influence your decision to sell a rental property.
For example, if you've been managing a local rental property and plan to make a cross-country move, selling the property might make more sense than hiring a property manager. On the other hand, if the property has a strong ROI and cash flow, hiring a property manager and holding onto the property could be the best option.
Tax Implications
You face a number of tax implications in selling a rental property. First, you'll need to pay capital gains tax unless you use a 1031 exchange and purchase another similar property.
You'll have to report depreciation recapture as ordinary income for tax purposes when you sell a rental property. Depreciation recapture is the gain you'll be required to realize and report as income from the sale of depreciable capital property.
If you retain the property, there are potential tax deductions related to the rental property's operation and maintenance, including insurance, repairs, management costs and maintenance.
Market Analysis
As a real estate investor, in-depth market understanding is essential to success and deciding when to sell a rental property. Conducting a comprehensive market analysis, including studying comparable property sales, current rental market trends and property appreciation potential, is important before deciding to sell.
Future Investment Opportunities
Looking for bigger, better investment opportunities can be a key for investors to continue building wealth. Carefully weigh the potential benefits of selling a rental property to capitalize on new investment opportunities. These factors can include diversifying your current real estate portfolio, purchasing larger or more lucrative real estate properties or investing in other asset classes with greater liquidity, diversification or ROI.
Emotional Factors
Investing can be emotional for many people. Whether you can handle market downturns or unfavorable circumstances and hold long-term emotionally depends on your temperament and goals. It's important to consider and address the emotional aspects of selling a rental property from positive and negative perspectives. These can include:
- Sentimental attachment to a property that regularly hosts family vacations, has been in the family for decades or is in some way sentimentally valuable to you.
- The stress of managing tenants can make even a strong ROI not worth the time, effort and additional stressors in your life.
- Need for liquidity for other goals like retirement or paying for children's college can make selling a rental property necessary.
These emotional factors can play a role in the decision-making process. Take your time, weigh the pros and cons and talk to family members, mentors or trusted advisers to find a solution that makes the most sense financially and emotionally.
Considerations for Buy and Hold Strategy in Real Estate
For many investors, the buy-and-hold strategy in real estate makes the most sense. In the last 60 years, the average sales price of a home has increased by more than 2,000%. While some will make the case that home prices have adjusted with inflation, most real estate investors will tell you property has outpaced inflation in the long term.
Potential scenarios where retaining a rental property for a longer duration might be beneficial include long-term financial goals and wealth-building for retirement or passing on generational wealth to your children and grandchildren. If you leverage a mortgage to purchase the property and earn rental income to pay off the mortgage, you're building semi-passive asset value on the rental property. Between depreciation and allowed expenses, there can be tax advantages to retaining ownership of a rental property.
Expanding Your Investment Portfolio
Whether or not you decide to sell a rental property, it's wise to continually assess the markets, watch the cash flow and ROI and diversify across rental properties and other investments. Ready to get started with your first rental property? Learn more about investing in single-family homes and how to buy your first rental property. Or, consider also REITs vs. rental properties.
Frequently Asked Questions
Can you sell a rental property with tenants?
Yes, in many cases, you can sell a rental property while it is occupied by tenants. Whether this is allowed depends on your rental contract and other stipulations. For many investors, purchasing an already occupied property is a bonus.
What expenses are deductible when selling a rental property?
Common deductible expenses when selling a rental property include the real estate commission, marketing and advertising expenses, repairs and maintenance, owner’s title insurance policy, transfer taxes, deed recording fees, home warranty costs and other closing costs.
Can I claim mortgage refinance points when selling a rental property?
Whether you can claim mortgage refinance points depends on your situation, so it’s best to speak to a tax expert. Many other costs, including attorney fees, state-required inspection fees, legal fees, appraisal fees, refinance application fees, insurance and repair costs, are also usually tax deductible.
About Alison Plaut
Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.
