How does one determine when to sell a rental property investment? If you are going to buy rental properties – having a plan in place for the appropriate time to sell is important.
I have worked with many individuals over the years and showed them how to buy rental property. There are many things that need to be considered when purchasing for investment purposes. There is also – definitely – a time to sell.
How to Buy an Investment Property
– Is the property in a convenient location? Is it near shopping, in a neighborhood with good schools, and is it easily accessible to interstates and connecting roads?
– Does the potential investment property have a sound foundation? What sort of issues does the home have? If it needs a new roof or the foundation is sunken in and is creating issues within the structure, it might not be a good investment at this time. If the issues are only cosmetic (needs a new bathroom floor, or painting, or carpeting) it may be worthwhile. Inspection reports will reveal the property’s flaws so the buyer and real estate professional can make a good decision.
– Do you have enough of a down payment to purchase the rental property so financing will not be an issue? In the current real estate market, most lenders will see a down payment of 40-50% as a good risk. If you can invest 100% into the property – this is even better.
– Income gained from the property needs to exceed expenses. Identify a credit worthy tenant, a reliable property manager, and a solid lease to make your property investment profitable. Property management fees are tax deductible.
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– For residential property investments, single-family homes as well as multi-tenant properties such as duplexes and fourplexes are great ways to build income and wealth. Some investors may want to consider apartment complexes. In this case a commercial property loan will be necessary to obtain financing.
– Use depreciation on the investment property as a way to receive an annual tax deduction. Check with your accountant, who will apply the depreciation deduction on the building, appliances — even window treatments. The government still allows tax deductions for accelerated depreciation on properties. Savvy real estate investors use this deduction to increase cash flow and net operating profit on a property.
When to Sell a Rental Property
I have a term for properties that need to be sold: alligator properties. These are properties that are eating the investor alive with carrying costs. When an investor looks at the bottom line on an alligator property – there is no profit – just expenses. An alligator property today may have been a good investment ten years ago. But some individuals will continue to hold a property until it depletes all of the profits they may have made in the first 5-7 years.
If a property has sentimental value (it was your first home, or your mother once owned it but now she’s deceased), some investors may tend to want to hold onto it. Having an emotional attachment to an investment property that is supposed to be generating income is not good. Sometimes an individual will hold this type of property even if it is not profitable. It may be time to consider selling this property.
– After a certain number of years, the depreciation tax deduction is used up on a property. Ask your accountant when this depreciation is no longer applicable. When the investment can no longer be depreciated – it’s time to sell that property, and purchase another rental.
– Consider selling the property and applying the 1031 tax code, so no capital gains tax is imposed on the profits. To paraphrase, the code states that an owner can sell one property in exchange for a securitized piece of property or tenant in common piece of property. Roll the profits from one property into a new investment to increase wealth and maintain it.
– On average, in the 12th year of property ownership — it is time to sell an investment. The decision to sell will depend on two factors. 1. Is there enough equity in the property to sell? Or, have you pulled out too much equity in the property? 2. Will the real estate market allow you to sell and obtain a nice profit? Ask a real estate professional for a custom market analysis on the property to see if it’s realistic to obtain a price that nets a nice profit.
– Alligator properties are not profitable for a variety of reasons. I am amazed at the number of investors who are not even aware that their property is losing money. If you have a property that might be losing money, then ask your real estate professional or accountant to perform a cost to income analysis. If it is indeed an alligator property — consider selling.
Investors buy and sell equities all the time. There is a time to purchase and a time to sell a home as well.
Elaine VonCannon is an award winning REALTOR with RE/Max Capital in Williamsburg, Virginia. She specializes in retirement and relocation in the Williamsburg, South Eastern Virginia area and in Virginia Estate properties. To learn more.