When To Sell a Rental Property [15 Reasons]

Seize the opportunity and maximize profits!

Deciding when to sell a rental property can be one of your most challenging decisions. The problem is that real estate markets are constantly changing. Selling a rental property too soon could mean missing out on a property boom. However, holding on to a dud property may result in significant financial losses.

When is the best time to sell an investment property? It all comes down to timing. Market conditions, tax breaks, property appreciation, investment goals, and personal circumstances can affect your decision. And sometimes, a combination of factors can dictate the right time to sell a rental property.

Whatever the reason, deciding when to sell a rental property or other real estate investment can be tricky. Even smart real estate investors cannot predict local housing markets with accuracy.

This article presents 15 compelling reasons why it may be the right time to sell your investment property.

1. A Strong Seller’s Market

Selling an investment property is a strong incentive when demand is high. A seller’s market typically means you can get top dollar for your property, and sell it fast. You can sometimes push the selling price higher with multiple interested buyers in a bidding war.

Additionally, selling property in a hot market means you can usually negotiate better terms. For example, a buyer may be willing to purchase a property needing repairs, take on existing tenants, or be willing to cover some or all the closing fees.

Of course, selling in a hot market means you may pay inflated prices on another property. However, it can be an excellent exit strategy to offload a property, diversify your portfolio away from real estate, or cash in on your investment.

2. Property Appreciation

Property appreciation is a significant factor when deciding to sell a rental property. It may be a good time to sell when the market is experiencing high demand, rents have stagnated or decreased, and your property has substantially increased in value compared to its initial purchase price.

To decide if it’s the right time to sell, compare the increase in rental rates with the increase in property prices. When a property appreciates faster than rental prices, your return on equity (ROE) decreases in the long term.

Additionally, suppose there’s a lull in appreciation rates. In that case, it may be time to reap the profits from a rental property sale and invest elsewhere. You can also benefit from the substantial equity in your property.

3. The Local Market Has Stagnated

Timing is everything when selling your investment property. Therefore, if the housing market has stagnated or the rental market is in decline, it may be wise to cut your losses and sell the property. But, of course, you must do due diligence to ensure the market will not recover in the short to medium term.

What are the signs of a weak or stagnated market? The signs could be falling rental prices, high vacancy rates, falling house sales, or high mortgage rates.

Although investing in real estate is generally a “buy and hold” strategy, sometimes it makes sense to sell rental properties if they perform poorly.

4. Negative Cash Flow

One of the most common reasons to sell a rental property is when expenses greatly exceed rental income. However, there can be various reasons why a rental home fails to generate profits.

Here are a few common mistakes startups make when purchasing an investment property:

They calculate expected annual gross income based on 100% occupancy rates.
Poor property management results in tenant turnover.
High vacancy rates cause lost rent.
The local rental sector is experiencing a downturn.
High maintenance or repair costs eat into profits.
Getting rental rate wrong—either not charging enough or charging too much.

Before selling your rental property, it’s crucial to determine the reasons for lost rental income. In many cases, it’s possible to address the issues and enjoy passive rental income again.

However, selling may be the best option if the problems seem long-term or too costly to resolve.

5. The Property No Longer Suits Your Investment Strategy

Some real estate investors decide to sell rental properties when changing or diversifying their investment strategy.

For example, selling a residential investment property could free up capital to invest in commercial real estate or join a real estate syndication. Or it could be that you have identified an emerging real estate market with huge investment potential, and selling your existing property gives you capital to invest.

Another reason to change investment strategy is to diversify geographic location. For example, suppose your primary residence, rental properties, and employment are all in the same area. In that case, your investments and income are at risk from fluctuations in the local economy. Therefore, diversification can help protect your investment returns.

Selling an investment property can be strategic when you aim to diversify your portfolio or seize more lucrative investment opportunities. By reallocating the proceeds from the sale, you can enhance your investment strategy and capitalize on stronger prospects.

6. Property Taxes Are Too High

A hike in property taxes can turn a once-profitable rental property into a loss-making enterprise. The issue is that passing on higher property taxes to existing tenants takes time. Therefore, you may struggle to cover expenses from rental income until the current lease expires and you sign a new rental agreement.

Selling rental properties in high-tax states in exchange for a similar property in a more landlord-friendly state is a common practice for rental property investors.

7. Maintenance Costs are Too High

The cost of maintaining a rental property—especially an older building—can make selling it a viable option. Landlords must maintain rental properties in a “habitable condition.”

Of course, responsible landlords budget for regular maintenance and repairs. However, higher-than-expected costs, contractor expenses, pest control, inflation, or unexpected work can make it untenable to maintain the rental property.

What can you do if maintenance is becoming a financial burden? First, assessing if you can cover losses in the short term is crucial. Then it may be possible to develop a better repair budget or adjust the preventative maintenance schedule.

For example, unexpected property damage could be viewed as a short-term issue, and you should quickly bounce back financially. However, a major employer pulling out of the town your rental property is in could severely impact the rental market, cutting your rental income. This situation can make maintaining a rental unit a long-term problem due to lost rent.

Or suppose an old building decreasing in value is becoming a money pit. In that case, it may be best to cut losses and sell your rental property before it loses more value.

8. Low Interest Rates

While low interest rates can benefit investors, it’s important to consider their impact on the rental market.

Cheaper mortgage rates can lead to increased homeownership, potentially reducing demand for rentals and making it challenging for rental property owners to fill vacancies or achieve desired rental rates. In such situations, selling an investment rental property may be a viable option to mitigate potential challenges.

9. Problem Tenants

One of the biggest pain points for landlords is dealing with tenants. In some cases, the stress problematic tenants cause can turn your job into a heavy burden.

For example, dealing with late rent, property damage, or antisocial behavior can take its toll physically, mentally, and emotionally. While it’s possible to evict delinquent tenants, the process is costly, stressful, and time-consuming.

Of course, the occasional problem tenant is normal. And in some cases, hiring a property manager alleviates the hassle of dealing with delinquent tenants. But if you no longer want to deal with bad tenants, selling a rental property and investing your cash elsewhere may be the best option.

10. You Want a Break From Property Management

Owning a rental property is an excellent way to earn passive income. However, managing a rental property or being a landlord is not a passive activity. If you own a single-family home that you rent out, hiring a property management company is probably not worth it. Therefore, you must take on all the property management tasks yourself.

But rental property owners who are landlords know the job can be exceedingly time-consuming. The day-to-day job of a landlord involves being on call 24/7, finding emergency contractors, collecting rent, screening potential tenants, and resolving disputes.

For some investors, selling a rental property makes the most financial sense to get their life back to normal.

11. You Get an Offer You Cannot Refuse

A compelling reason to sell an investment property is when you receive an offer that’s too good to pass up. For example, a real estate investor may be willing to pay more than market value or waive certain requirements like repairs or upgrades. So it can make selling the investment asset a no-brainer for a savvy property investor.

12. Avoid Capital Gains Tax Liability

Selling your rental property to buy a more attractive one can help you defer capital gain taxes. Known as a “like-kind” exchange, section 1031 of the Tax Code allows you to pay taxes on capital gains later. This strategy can be effective in real estate investment to build an extensive portfolio without paying taxes on every transaction.

In general, selling an investment property triggers capital gains taxes, which are calculated based on the profit made from the sale. The Internal Revenue Service (IRS) imposes taxes on the capital gain at a specified rate.

However, utilizing a 1031 exchange allows you to defer the tax liability for capital gains, potentially offering tax advantages in real estate investment. It is important to consult with a real estate tax professional to understand the tax implications and requirements of a 1031 exchange.

Additionally, you can defer paying depreciation recapture taxes when selling an investment property and buying a similar one. Depreciation recapture tax is the taxable amount on deductions you made for property depreciation.

When selling an investment property, depreciation recapture tax has one of the highest rates. Therefore, you can defer taxes on the transaction when you sell an investment real estate asset to buy a replacement property of equal or greater value.

It’s important to note that the capital gains tax rate varies from state to state and your tax bracket. Therefore, if you plan on selling an investment property to lower your tax liability, you should speak to a real estate tax professional.

13. Major Life Event

A significant life event can make you reevaluate priorities, goals, and responsibilities. And let’s face it: Finding the best investment opportunities and managing properties is time-consuming. So when something major happens in life, it’s natural that you ask yourself the question: “Is now the right time to sell my investment real estate assets?”

In certain situations, selling your investment real estate assets may be necessary due to circumstances beyond your control. However, carefully consider the advantages and disadvantages of continuing your real estate investment career. Selling the properties can help mitigate potential financial losses associated with leaving them vacant and provide essential funds to navigate significant life transitions.

Or it could be that you have reached your financial goals and now want to take it easy and regain your work-life balance.

14. You Inherited a House

Inheriting a house can be a valuable asset you can use or sell for financial gain. But maybe you have no desire to become an “accidental landlord” and want to benefit from the sale of the property. In that case, it makes sense to sell the inherited property. However, you will still be liable to pay inheritance tax, estate taxes, and possibly capital gains tax.

On the other hand, you could decide to keep it as an income property. Then you could use the rental payments to supplement your regular income. But if being a landlord doesn’t appeal to you, you could use a property manager to manage the property.

15. You Want Out of Real Estate Investing

If you have achieved your financial goals and chosen to retire from real estate investing, you can benefit from a substantial nest egg by selling your properties. Alternatively, you can consider investing your cash in passive investment opportunities with recurring cash flow.

Should You Sell Your Investment Property?

Some investors say the golden rule of smart real estate investing is to make smart property purchases and never sell. But—as with all rules—there are exceptions. For example, when selling or holding investment property, individual circumstances can dictate that it’s a smart move to sell.

Most reasons for selling investment properties are related to profit. However, holding on to a dud property in a weak housing market can cost you money. So it may not be worth selling a rental property where expenses significantly exceed rental income.

However, it’s also worth calculating the costs of selling rental property. Seasoned investors know that selling property isn’t cheap. You must pay legal fees, closing costs, commission, and hefty capital gains taxes. Therefore, it makes financial sense to factor in all costs when deciding whether to sell or hold a rental property.

Strategies to Sell Investment Properties

When you decide to sell an investment asset, it’s vital to consider the tax implications to avoid taking a large tax hit. For example, there is a difference between selling a personal residence or one used for business or investment purposes. Also, the time you own a property can affect your tax bill.

Here are some of the tax consequences when selling a rental property:

Short-term capital gains: A property you own for 12 months or less before selling. These capital gains are taxable income at the standard tax bracket ranges.
Long-term capital gains: Property assets you hold for 12 months or more before selling. Tax rates are lower than for short-term capital gains tax.
Depreciation recapture tax: Filing a noncash depreciation expense can help reduce tax liability. However, you are liable for depreciation recapture tax when you sell your rental property.
1031 exchange: You don’t pay tax on the transaction if you sell your rental property for “like-kind” property. You can defer tax payments to a later date.

You may be able to convert the investment property into your primary residence to reduce your taxable net income. For example, the “Home Sale Exclusion Gain” (IRS Section 121) lets you exclude up to $500,000 in profits if you are married filing jointly and $250,000 if you are single.

15 Undeniable Reasons It's Time to Sell Your Investment Property