Real estate investors often ask, “When should I sell my investment property?” While the right answer is highly dependent on each individual situation, here are some common factors to consider when making this decision.
As Stephan Covey said, “Begin with the end in mind.” What are you trying to accomplish with your real estate portfolio?
Is your goal to own one investment property that is paid off (debt free)? Or is your goal to scale your real estate portfolio so you can grow your wealth at a faster pace?
How much total cashflow are you looking to generate? Will your current investment property help you reach your cashflow goal even if it were paid off? Or will you need to acquire additional rental units? If so, selling and using the equity to purchase multiple properties OR a larger property could help you reach your goals faster.
You’ve probably heard of return on investment (ROI), but have you calculated your return on equity (ROE) lately? As a property appreciates and the tenants help pay down your mortgage, the difference between the property value and the amount owed will grow. That difference is the amount of equity you have in the property.
While growing property equity is a very good thing, and one of the ways real estate helps investors build wealth, the money is essentially “trapped” in the property. An increase in equity typically doesn’t equate to an increase in cash flow. Smart investors want to ensure their money keeps working hard for them.
If your Return on Equity is too low, you may be better off recapitalizing by selling the property and using it to purchase additional assets. How low is too low? Again, it depends on your goals, but some investors use a 4% ROE as the threshold when deciding whether to sell or hold.
Most investors get into real estate to help grow their wealth, provide clean affordable housing for others, and pursue financial freedom – not to create a second (or third) job for themselves. When weighing whether to hold or sell, it is important to consider how much time and effort you spend managing your real estate assets and then decide if the return is worth it. Some properties are easier to manage than others because of their location, tenant base, or age. Some real estate investment strategies are more time intensive than others. If the juice isn’t worth the squeeze, it might be time to sell!
One of the first investment properties we purchased was a duplex in the greater Tacoma area. We had planned to put around $30,000 in renovations into the property (including a full roof replacement) after the tenants had moved out. Three years and multiple rent increases later, the same tenants (who were great folks by the way) were still living at the property and the building had appreciated close to $100,000. Rather than wait a few more years and spend $30,000 on repairs, we chose to sell and offered the buyer a small credit for the roof and other repairs. This was a win-win for all parties.
Be sure to consider the local real estate market conditions and the future outlook. Are properties appreciating or are prices stagnant? What about rents? What is the political climate? Are there threats of rent control or other draconian measures that will make it difficult to own a rental property?
While no one can predict the future with 100% accuracy, a knowledgeable local real estate professional can provide lots of valuable insight so you can make an educated decision.