Every seasoned investor has a story of something they sold 20 years ago for what seemed like a nice amount of money, only to see it be worth twice as much today. That’s just a fact of life. Still though, there are times when letting a property go makes sense. Here’s how to decide when to sell an investment property.
Let’s say you have a really nice single-family residence in a very expensive part of the country. It’s a $1 million home and you’re renting it for $5,000 month. You bought it a while back, so you’ve got some nice equity in it and it’s generating a positive cash flow.
What could be better — right?
Well, how about 10 $100,000 homes that could bring you a total of $14,000 monthly. Plus, you have the added advantage of diversification. If your tenant moves out of that $1 million dollar house, you’ll be dead in the water until you can replace them. If one of the ten moves, you still have nine other properties making money while you find someone to rent the tenth one.
In this case, it makes sense to sell.
There are times when selling makes sense from a tax perspective as well. Say for example when your depreciation benefit plays out. Following this strategy, you’ll hold a property only for the number of years you’re allowed to take a depreciation deduction against it. While it’s somewhat complicated to explain in its entirety here, the IRS allows you to apply depreciation of a property against its rental income to lower your tax liability for approximately 27.5 years. You can also get this from turnkey real estate investing. Learn all about it here.
At the end of this period, you might be better off selling and getting a new property so you can start the depreciation cycle again. The effectiveness of this strategy largely depends upon your tax bracket. You’ll also be liable for taxes on the depreciation amount when you sell the property, so you have to make sure the replacement property is capable of absorbing those costs while still providing a positive cash flow.
Finally, there are times when the decision is made for you. Divorce, unexpected medical expenses, an interruption in your primary revenue stream, these can all trigger a decision to liquidate one or more of the properties in your portfolio to satisfy unexpected debt. There is no controlling the timing in these instances, so it may or may not be the ideal time to sell—but it will be the right time to sell because your other choices aren’t capable of generating the cash you need to cover the situation.
With that said, you always want to avoid selling property in a panic. When the market drops for some reason, like it did back in 2008, people are tempted to cut what they perceive to be their losses and get out. However, investors who managed to hold on to their portfolios are watching them appreciate again. Like so many things in business, the best way to make the decision is to analyze the situation, look at the trends and base your decisions upon what will make the most sense in the long run.
Ultimately, that’s how to decide when to sell an investment property.
This article was provided by our friends at the OneRent team.
Onerent is a rental leasing and management service for the modern owner and renter, managing over 1,000 properties across the San Francisco Bay Area, and Greater Seattle. Onerent offers free real estate education and resources on the Build with Onerent Blog. Find answers to all your legal maintenance finance and leasing questions as well as real estate news that affecting the housing market.