When should I sell my rental property

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y

5-7 years. That's when the CAPEX starts to kick in for all the items you didn't replace when you first got the property. Replace them when you buy, and you can bury the cost in the mortgage and have the tenants pay them off in small amounts over time. The cost will be spread out over the length of the mortgage (30 years), so in reality, you're not even going to pay full price for the use of it.

Pay for it after you buy the property, and it's a lump sum out of your pocket...and all that cash flow you made up to that point goes "bye-bye" in what seems like an instant.

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  • Robert Biggerstaff
    Contractor · Pensacola, FL · Member since 2018 · 303 posts · 240 votes
    7y

    When you need some money

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    When you are ready to retire, when you have negative cash flow or it becomes more stress than it is worth. If it has a large amount of equity created by appreciation and principal pay down that can not be removed and still produce positive cash flow it's time to sell. When a property is not positive with maximum leverage it means your own cash is the only thing generating income. You want the property not your cash generating income.

    3Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y

    5-7 years. That's when the CAPEX starts to kick in for all the items you didn't replace when you first got the property. Replace them when you buy, and you can bury the cost in the mortgage and have the tenants pay them off in small amounts over time. The cost will be spread out over the length of the mortgage (30 years), so in reality, you're not even going to pay full price for the use of it.

    Pay for it after you buy the property, and it's a lump sum out of your pocket...and all that cash flow you made up to that point goes "bye-bye" in what seems like an instant.

    15Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    7y

    Great point regarding CAPEX @Joe Villeneuve  

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    Usually around 7-10 years the ROI will drop significantly. You can sell the home, split the equity, and buy new investments to keep the ROI maximized.

    But it depends on your goals. If you want safe money and fewer headaches, sell the properties now and invest in something safe and accessible that requires less involvement.

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    5Reply
  • Matthew Insley
    Springfield, OH · Member since 2017 · 13 posts · 8 votes
    7y
    Originally posted by @Nathan Gesner:

    Usually around 7-10 years the ROI will drop significantly. You can sell the home, split the equity, and buy new investments to keep the ROI maximized.

    But it depends on your goals. If you want safe money and fewer headaches, sell the properties now and invest in something safe and accessible that requires less involvement.

    @Nathan G what contributes to ROI dropping in 7-10 years? I am a new investor and would love the insight. Thanks

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    "what contributes to ROI dropping in 7-10 years?"

    Increased dead equity through principal pay down and/or appreciation.

    Equity kills your returns meaning you must pull it out, assuming you can still generate positive cash flow on the property, or if not you must sell.

    When ROI drops below what can be earned in a basic income fund (10%) it is no longer a worth while investment. This type of individual that ignores or sit on dead equity is no longer a investor, they are cash hoarders. Their money is no longer working efficiently for them and they are simply ignoring their investments, preparing to sell to retire or waiting to die.

    5Reply
  • Kai Van Leuven
    Investor · USA · Member since 2015 · 325 posts · 447 votes
    7y

    @Samuel Chua

    After you die is usually the best time to sell... Heirs avoid paying taxes on all the equity and appreciation. That is my plan, lol.

    3Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    "After you die is usually the best time to sell"

    Funny thing is many investors believe their income properties will be left as a legacy to their children. Likelihood is the properties will all be listed for sale before your body is cold. They will have their own plans for the money, likely not rental properties. Cash is king.

    3Reply
  • Samuel Chua
    OP
    Singapore · Member since 2019 · 78 posts · 9 votes
    7y
    Originally posted by @Nathan Gesner:

    Usually around 7-10 years the ROI will drop significantly. You can sell the home, split the equity, and buy new investments to keep the ROI maximized.

    But it depends on your goals. If you want safe money and fewer headaches, sell the properties now and invest in something safe and accessible that requires less involvement.

    Thanks for replying to my post. May I know why the ROI will drop significantly after 7-10 years? Also, if I do sell the property, what do u recommend me to invest that is safe and accessible and also requires less involvement? Thanks!

    0Reply
  • Samuel Chua
    OP
    Singapore · Member since 2019 · 78 posts · 9 votes
    7y
    Originally posted by @Thomas S.:

    "what contributes to ROI dropping in 7-10 years?"

    Increased dead equity through principal pay down and/or appreciation.

    Equity kills your returns meaning you must pull it out, assuming you can still generate positive cash flow on the property, or if not you must sell.

    When ROI drops below what can be earned in a basic income fund (10%) it is no longer a worth while investment. This type of individual that ignores or sit on dead equity is no longer a investor, they are cash hoarders. Their money is no longer working efficiently for them and they are simply ignoring their investments, preparing to sell to retire or waiting to die.

     Sorry, could you explain this "Increased dead equity through principal pay down and/or appreciation."? Thanks!

    0Reply
  • Samuel Chua
    OP
    Singapore · Member since 2019 · 78 posts · 9 votes
    7y
    Originally posted by @Joe Villeneuve:

    5-7 years. That's when the CAPEX starts to kick in for all the items you didn't replace when you first got the property. Replace them when you buy, and you can bury the cost in the mortgage and have the tenants pay them off in small amounts over time. The cost will be spread out over the length of the mortgage (30 years), so in reality, you're not even going to pay full price for the use of it.

    Pay for it after you buy the property, and it's a lump sum out of your pocket...and all that cash flow you made up to that point goes "bye-bye" in what seems like an instant.

    Thanks for replying, however, I do not quite understand when you said "pay for it after I buy the property" Should I try to hold the property for as long as I can, just before my CAPEX expenses come in and sell it before that? Thanks!

    1Reply
  • Kai Van Leuven
    Investor · USA · Member since 2015 · 325 posts · 447 votes
    7y

    @Thomas S.

    If all my properties are sold by my kids before/soon after I die then it falls back on me for not teaching them well enough.

    Maybe the story of the “Goose that lays the Golden Egg” should have been reiterated.

    7Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Samuel Chua when you would no longer buy it as an investment, based on rent to value

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    @Kai Van Leuven

    Gather the eggs, sell them and the goose, retire. How much is enough.

    1Reply
  • Rahul Handa
    Bolingbrook IL · Member since 2018 · 57 posts · 13 votes
    7y
    Originally posted by @Nathan Gesner:

    Usually around 7-10 years the ROI will drop significantly. You can sell the home, split the equity, and buy new investments to keep the ROI maximized.

    But it depends on your goals. If you want safe money and fewer headaches, sell the properties now and invest in something safe and accessible that requires less involvement.

     Isn’t real estate safe and less involvement needed? R u preferring to something else

    0Reply
  • Adam Greene
    Real Estate Agent · Stilwell, OK · Member since 2013 · 54 posts · 23 votes
    7y

    @Rahul Handa he was referring to all the equity built into the property, its just sitting there not doing anything, if you sell and take that inert cash and put it down on say two or three new rental houses each one of them can be generating cash flow and building equity. Vs just the one.. 30+% is > than 10% ROI

    Its one way to exponentially increase the growth of your net worth... I like the strategy; if done correctly it can also spread your risk out some across multiple tennant's. As always keep a healthy reserve as multiple vacancies can quickly drain your folding money.

    1Reply
  • Samuel Chua
    OP
    Singapore · Member since 2019 · 78 posts · 9 votes
    7y
    Originally posted by @Adam Greene:

    @Rahul Handa he was referring to all the equity built into the property, its just sitting there not doing anything, if you sell and take that inert cash and put it down on say two or three new rental houses each one of them can be generating cash flow and building equity. Vs just the one.. 30+% is > than 10% ROI

    Its one way to exponentially increase the growth of your net worth... I like the strategy; if done correctly it can also spread your risk out some across multiple tennant's. As always keep a healthy reserve as multiple vacancies can quickly drain your folding money.

     Thanks for replying to my post! However, I do not quite understand why the total equity of the property drops when It is there for 5-7 years or more. Thanks!

    0Reply
  • Samuel Chua
    OP
    Singapore · Member since 2019 · 78 posts · 9 votes
    7y
    Originally posted by @Thomas S.:

    "what contributes to ROI dropping in 7-10 years?"

    Increased dead equity through principal pay down and/or appreciation.

    Equity kills your returns meaning you must pull it out, assuming you can still generate positive cash flow on the property, or if not you must sell.

    When ROI drops below what can be earned in a basic income fund (10%) it is no longer a worth while investment. This type of individual that ignores or sit on dead equity is no longer a investor, they are cash hoarders. Their money is no longer working efficiently for them and they are simply ignoring their investments, preparing to sell to retire or waiting to die.

    I understand why the ROI decreases but could you explain to me exactly why it decreases? I understand the maths but not the logic behind it. This is because after I have gotten enough monthly rents to pay off my total cash invested, won't I be gaining even more? Thanks!

    0Reply
  • Storm S.
    Real Estate Agent · Santa Barbara, CA · Member since 2016 · 518 posts · 283 votes
    7y

    @Samuel Chua I think it would be easier to understand why your return on equity (ROE) would be decreasing. The formula for ROE is

    Net income / Amount of Equity

    As your equity goes up every month from paying down the principle your ROE goes down. You want to maximize your ROE by cash out refinancing or by selling the property and reinvesting the funds. When your ROE gets to low. ROI = ROE on all cash deals. I don't like using ROI for real estate it really has no meaning until you sell the property, and doesn't account for the time value of money. IRR is a much better profitability metric to use to get the total return for real estate projects. Cash on cash return is a good method for analyzing potential acquisitions for a quick back of the envelope deal underwriting. It's only useful for the first year though.

    3Reply
  • Justin B.
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    7y

    Personally, what I use is the potential return in selling vs continuing to rent.  I'm not sure I have a HARD set # I look at, but I do this.  If I can sell the property and turn that gain into higher cash flow I would do it.  Also, I look at how long it would take to make the same money by renting.  One of my examples is I was able to sell a property and make $25k in profit after taxes.  I was making $150/month cash flow.  So the question was sell now and make $25k or wait ~14 years (assuming no major expenses which is almost certain over that amount of time, but the increase in rent may even that out and keep it at the same timeframe).  I took the $25k and rolled it into another property that gave me $300/month cash flow.  for me, that's a no brainer.  But again, your goals determine whether that's a valid strategy or not.  There are other ways to increase cash flow however (ex: refinance and reduce the mortgage), but again, the above is kind of what I use at a high level.

    2Reply
  • Samuel Chua
    OP
    Singapore · Member since 2019 · 78 posts · 9 votes
    7y
    Originally posted by @Justin B.:

    Personally, what I use is the potential return in selling vs continuing to rent.  I'm not sure I have a HARD set # I look at, but I do this.  If I can sell the property and turn that gain into higher cash flow I would do it.  Also, I look at how long it would take to make the same money by renting.  One of my examples is I was able to sell a property and make $25k in profit after taxes.  I was making $150/month cash flow.  So the question was sell now and make $25k or wait ~14 years (assuming no major expenses which is almost certain over that amount of time, but the increase in rent may even that out and keep it at the same timeframe).  I took the $25k and rolled it into another property that gave me $300/month cash flow.  for me, that's a no brainer.  But again, your goals determine whether that's a valid strategy or not.  There are other ways to increase cash flow however (ex: refinance and reduce the mortgage), but again, the above is kind of what I use at a high level.

     Hmm, that is a good point, Thanks! However, why did you choose to hold the property until that stage till u received 25k in appreciation? For example, if I had bought a property for 50k and rehab it for another 20k with its aftermarket value at 100k, it would only cash flow of $400 a month and if I use your method, I will be gaining 30k upfront or wait for another 6.25 years before my cash flow reaches that level. Hence, if my goal is to build up as much equity as I can, won't selling upfront work for me? Thanks!

    0Reply
  • Justin B.
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    7y

    Potentially.  for me, that's just when I noticed it.  I'm not so on top of things that I'm looking every month.  In this case, our loan came due (balloon) and we decided to sell versus refinance.  I could have taken money out via refinance as well, but in this case, we were looking to get out of this particular neighborhood.

    0Reply
  • Jennifer Rysdam
    Rental Property Investor · Cleveland, MN · Member since 2017 · 518 posts · 354 votes
    7y

    Here is my example. I have an 8-plex that I bought in 2017 for $175,000. He was desperate to sell because his Rural Dev. loan had been paid off and his section 8 classification ended, however tenants weren't paying the full rent like they were supposed to. His numbers were horrible because of this, and also because he's an older gentleman and paid for everything to be done there. It had been listed for a while and a couple of sales had fallen through. I offered him his price on a contract for deed, with 5% interest, $800 per month, and $10,000 now, $10,000 in 6 months, and $10,000 in 12 months. I set it for 5 years, but told him I'd pay it off as soon as I could get bank financing. (A little over a year later I was able to get the financing and the appraisal came out at $300,000)
    I immediately laid down the law there, started getting the rents up to market, got rid of bad tenants, remodeled 3 of the units, added landscaping, took care of deferred maintenance, etc. If I were to sell it right now for the $300,000 (I currently owe $150,000) I would walk away with $150,000 that I could use on a 1031 as 20% down on a $750,000 building.
    I would only be using the money I have already invested, plus equity, and my NOI on the larger building would be much greater. This is why I will sell. However, I'm waiting until next summer because I'm moving and want to invest there :)


    You have to sell when it works for you. The whole goal is to improve your standard of living and cash flow.

    2Reply
  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    7y
    @Thomas S. If you have appreciation, where do you put your profits? Everything else has appreciated, too. Locally. Pay the gains and depreciation recapture and buy in the same market? 1031 into two properties? Buy somewhere else? I would never do that. Sell to tenants and tote the note? Buy an annuity?...I just turned 60.
    0Reply
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