As a smart real estate investor you spend a tremendous amount of time deciding to purchase a property. Even in markets that are red-hot and fast-moving you analyze the situation and decide on your investment parameters so that you can pounce on a deal the moment you recognize it. But what about selling? Choosing the right time to sell a rental property may be more crucial to your success as a real estate investor than your initial decision to purchase it.
Any investor who has been in the game for a while has a story or two about the house he wishes he hadn’t sold or others that should have been sold long before they actually were. Where is that crystal ball when you need it? It’s often better to be lucky than good, but the long-time baseball general manager, Branch Rickey, once said that “luck is the residue of design.” If you want to be “lucky” it is crucial to put as much thought and effort into timing a sale as you do in making the initial buy.
Evaluating your Rental
The most obvious reason to sell a rental property is because it has a negative cash flow, in other words it costs more to own and maintain than it produces in income. Why would someone buy a property like that in the first place? Maybe they didn’t. The cost of taxes, utilities and insurance may have risen, market rents may have dropped, or both. Losing money each month is a strong indication that it’s time to reevaluate the situation. It still isn’t an automatic decision since there may be valid reasons to hold a property that loses money. Perhaps the likelihood of appreciation is strong because of things happening in the area or the rents are expected to rise in the near future. Holding a loser long enough to change the tax on a gain from ordinary income to much lower long-term capital gain is an excellent reason to hang on for a little while. You do need to be careful not to hold on to property that is just hemorrhaging cash with little hope of the situation improving.
What about a rental that is making money? How do you determine when it’s time to cash in? This requires a little more thought. Does the property still fit in with your overall plan for your investment business? Is the property a good fit with the rest of your real estate portfolio? What are the expectations for cash flow, vacancy, maintenance, and appreciation? Is the neighborhood changing? Are you expecting any major repairs such as a roof or furnace? Are you suddenly having a problem with your tenants or property manager? The biggest question – would you buy this property today?
Evaluating your Future Plans
In any investment business, real estate or otherwise, there are times when you need to cash in your profit or cut your losses. Many investors lose money because they are reluctant to take a loss or they are waiting for a rebound. Sometimes greed comes into play. Trying to squeeze every last ounce of profit may leave you vulnerable to a market downturn. We certainly saw a lot of that in the recent bubble. Ultimately the decision to sell or hold on comes down to your long and short-term goals. If your rental no longer fits your plan it is definitely time to sell. You do have a plan, right?
Nobody ever lost money taking a profit. – Bernard Baruch
Photo Credit: Kate Ter Haar