How do you know when it’s time to sell your rental?

Question

My rental has 70% appreciation since I bought it but because it's in the Deep South and cheap I could get max $170k and the mortgage pay off is $97k. How do you know when you need to sell and to reinvest the equity elsewhere? Currently I have great cash flow and I'm torn between selling or keeping but paying off

Bartosz Rosol · Answer

Do you have an alternative opportunity idea?

The risk free rate is 4% (checking acct). What’s the CoC on this property? Can you beat that with another investment?

Account Closed · Answer

How much cash did you invest? What is your cash flow per month after all expenses including loan payments?

Dave Foster · Answer

@Eric Blair, The right time to sell is

1. When the performance of the property isn't attractive

2. Capital expenses are looming

3. Depreciation is almost maxed out.

4. Your equity could demonstrably bring in more ROI than leaving it in that property.

5. A dozen other reasons unique to you.

If you decide to sell, I would look into doing a 1031 exchange. In addition to the tax on your appreciation, you would also have to recapture any depreciation taken on the property since you've owned it if you do not do a 1031.

A 1031 exchange would allow you to defer all of the tax and depreciation and reinvest it into another investment property or properties. Depending on the direction you want to take or your overall investment goals, this would allow you to scale up your portfolio more easily, using the tax to your advantage.

James Mc Ree · Answer

Answering your question requires some knowledge of your financial plan and what you would do next with the money. My rentals are part of a financial plan that supports future goals. I wouldn't sell unless there was a driver to improve my position. Appreciation alone isn't a reason to sell for me since I would likely end up buying another similarly appreciated property.

One selling driver me be to suppose one of my rentals was approaching 27 years owned by me. My depreciation is about to run out, but I want to keep the cash flow going. I would look to 1031 exchange it for another versus just selling it to keep the cash flow and the depreciation. I am about 14 years away from this scenario.

Alternatively, maybe I need the property equity as cash to do something (new house, kids' college, travel, etc). I could sell a property to support that goal, ideally if that was the plan.

Landlords might sell if they are tired landlords and just want to get out of the business. In that case, selling to cash and putting it all into an index fund might make sense if the financial plan goals are still covered.

How do you know when it’s time to sell your rental?

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