4 Signs It's Time To Sell Your Rental Property
The timing of the real estate market isn't the only sign you need to consider when deciding whether to sell. Reviewing the financial metrics of the property itself, such as the real estate cap rate or your own financial goals, are essential to making the right decision. Follow along to learn four of the most important factors to consider.
1. Loss Of Positive Cash Flow
Your investment's cash flow is the cash transferred in and out of the property. If the property's outflows (the money spent on expenses like insurance, taxes and repairs) are greater than its inflows (the money you make from rent) it might be time to sell.
The time to consider selling is when the investment shifts from consistently positive to consistently negative cash flows. If the cost of repairs or a changing market (more on these below) forces you to spend too much on maintenance or keeping the property rented, the property may be more valuable as an asset to sell rather than one to bring in consistent income.
2. The Need For Costly Repairs
The need for expensive repairs is one of the most common rental property issues that can skyrocket your inflows and lead to negative cash flows. On the bright side, some repairs or renovations can attract renters at a higher price. However, constantly dealing with pesky repairs can scare renters away and leave you with hefty bills to pay with no rental income.
If you're trying to decide whether to spend on repairs or sell your rental property, determine your real estate investing ROI before you make the final decision. To calculate the ROI for a rental property, subtract your annual operating costs from your annual rental income and divide it by the amount you still owe on your mortgage. Using this calculation, it may be time to sell if the repairs cause your ROI to go too low or even dip into the negatives.
3. Shifting Market Conditions
Not all reasons to sell your rental property have to be negative. If market conditions send the value of your property skyrocketing, it may be a wise move to take advantage of the hot market and sell the home for a significant profit. If the housing supply is low and demand is high, the market is perfect for both you and your potential buyer. With less competition in the market, you'll be able to sell at the highest possible price. Even with these high prices, the high demand for housing means that your buyer should be able to find renters easily, making the deal a win-win for everyone involved. Other factors that could increase the value of your home enough to convince you to sell include:
- Low interest rates
- Favorable mortgage lending terms
- Positive local and national economic indicators
4. Growing Investments
So, you bought a house for a great price, renovated it, found reliable renters and held it for a few years to collect the profit and allow it to appreciate. This passive income may sound like the end goal, but for many investors, it’s a sign that you're ready for the next adventure. But what if you don't have enough liquid capital to buy your next investment? Selling a rental property for a profit is an excellent way to get cash to fund your next bigger and better investment.
Remember that your next deal doesn't have to be another rental property. Many types of real estate investments will allow you to diversify your portfolio and make even greater profits in the long run.
