When to sell investment property
Most investors hope that every property they acquire is a potential gold mine. While the process of searching for and selecting investment properties is often exciting and fun, once an investor has scooped up a property that they feel has great income potential, they need to keep a close watch to ensure the investment pans out as expected.
If you’re distracted you might miss some inconspicuous signs that the property is not what you envisioned. That said, how do you know what a good rental property investment looks like? Keep track of the answers to these questions:
1: Does the property remain cash positive month after month?
When you’re investing in rental property, the first thing you need to establish during the selection process is the property’s potential cash flow.
The first thing you want to do when choosing a rental property is to determine its potential cash flow. Utilize sites like Apartment.com, Redfin, WalkScore, and Cozy to research rent prices for comparables for a specific property. Next, review the monthly principal, interest, property tax, and insurance (PITI) on the property and subtract your rent price estimate from your PITI. Do you come up with a positive cash flow from the calculation? Positive cash flow is the first determinant when it comes to good investments.
2: Is it in a high-demand area among renters?
Everything you’ve learned about location, location, location is true when it comes to rental property investing. Potential renters descend on desirable communities—those that are walkable, close to public transportation access, shopping, parks and beaches, entertainment, and popular local destinations. Properties that are close to university campuses offer great rental potential. Despite high tenant turnover in rentals close to campuses, demand is always just as high meaning your vacancies won’t last long.
Additionally, look at properties in up-and-coming communities. Some neighborhoods price many people out of the market, so renters will search in locations close to the over-priced target neighborhood.
3: Will you be able to manage the property easily?
Investing in rental properties close to home makes managing them easier than if they’re a distance from you. A good real estate investment is located near where you live. It’s low maintenance and provides a streamlined property and tenant management system. For example, a single-family home rental, 10 years old and 10 miles from your home can be simple as far as property management goes. Hire a lawn care service, a maintenance worker, and use an online service for rent collection and communicating with tenants regarding maintenance requests. These qualities should add up to a good investment. However, if the property requires a high level of maintenance or its units are hard to rent, it’s probably not such a good investment.
4: When should you sell your investment property?
While property investors should generally take a page from stock market investors’ playbook (buy and hold), when you recognize the signs that it’s time to sell and reinvest (or get out of real estate investing altogether), you may be conflicted about which way to go.
Here are some indisputable signs that it’s time to sell:
• Consistently negative cash flow
Just as a consistently positive monthly cash flow is the top reason to invest in a property, consistently negative monthly cash flow tells you it’s time to sell. Unless you’re considering making moving in and making it your home, cut your losses and sell.
• You’re landlording remotely
Managing rental property that isn’t close to home makes it difficult to maintain relationships with tenants, makes showing vacancies a nightmare, and if you’re handling your own maintenance requests forget about it. It isn’t easy to landlord from a distance. If you own a rental property from which you’ve moved a distance, consider selling it and reinvesting in a property closer to home. Not only will a new, closer property be easier to manage, but you’ll also have more control over your investment.
• The cap rate has changed.
A cap rate is the income-expenses/value and the goal is to keep the cap rate between 5 and 10 percent. Generally, investors identify the cap rate when selecting a property. However, if you are ambivalent about whether to keep or sell a rental property, try reexamining this equation. A few changes can take place in the course of the life of a property’s ownership that can transform a good cap rate to bad. An increase in property taxes, a downturn in the local rental market, higher maintenance or utility costs than expected—add up your monthly expenses over the year and subtract that total from the property’s annual income. Divide that figure by the property’s current value; if you get less than 5 percent, you may want to consider selling.
Real estate investing can be profitable, and assuming a buy-and-hold strategy is usually the best plan of action. However, there will be times in which you’ll need to take a long, hard look at your investments and decide if an investment still makes sense. If you decide it doesn’t make sense anymore, relinquishing a property that isn’t working for you frees you up to move on to the next investment.
When to sell investment property