When to sell a rental property: A complete guide

If you have a rental property, you might be at a place where you're mulling over the possibility of selling it for many reasons.

To make sure it's the right choice for you, you'll need to factor in various market, personal, and property-specific factors. Taking stock of everything, including its short- and long-term impacts, can help you get a thorough look at everything that goes into selling the property.

By being clued in about all the factors that go into when to sell a rental property, you can gauge whether the timing is right for you.

6 signs it might be time to sell your rental property

There are a lot of solid reasons why you might want to hold onto your rental property. It can generate rental income for years to come or provide a second home during your retirement years. But there are the telltale signs that signal it might be a good idea to sell your property.

Here are common signs that signal it's time to sell your investment property:

Your cash flow is negative

When you're pouring more money into your investment property than you're getting out of it, you have what’s called a negative cash flow.

This might happen for a handful of reasons, such as expensive repairs, increased property taxes, or homeowners insurance. Falling rental prices can all affect how much you're raking in each month in rental income.

If you're running up against a negative cash flow and it's an ongoing issue, it could be a good idea to sell. If you’ve already tried to boost the cash flow from your rental property but are still losing money on the property, it may be time to consider selling. For example, if you've upgraded and added amenities or improved energy efficiency, but renters are not willing to pay what you need to make a profit, it may be time to consider a different investment.

The property needs costly repairs or maintenance

A leaky roof or foundational repair can be a sound reason to sell your property. These are indeed financial and practical reasons, as major repairs or ongoing maintenance can cost a pretty penny, not to mention are a huge investment of time.

Frequent issues with your home can make it harder to snag and keep tenants. On the flip side, there's also the chance that renovations can improve its property value over the long term.

To decide whether you'll want to go forward with major repairs or selling the investment property, start by figuring out your return on the investment in your rental property.

You'll first want to factor in everything that can impact the ROI on your property, like economic indicators such as real estate market conditions, location, interest rates, and the purchase price on the property. From there, you can calculate the ROI on your home.

Your property’s value has significantly grown

If your property's home value has increased substantially, you might want to sell it to net a large profit. While it also means missing out on future potential increases in your home's value, it may be the right choice if you don't want to deal with ongoing maintenance, renovations, and managing the property.

To figure out a home's actual market value, you can use home valuation tools, hire a professional appraiser, or consult with an agent for a Comparative Market Analysis (CMA). You can also pull "real estate comps," which are comparable homes in the area where you're looking to sell.

Market conditions have shifted

Shifts in the demand and supply of housing can drive you to consider selling your home. For example, a seller’s market can mean you'll have greater odds of eager buyers with competitive offers. In turn, you can rake in a higher profit. High demand can also make it easier to sell rental properties. That's because fellow real estate investors will run into fewer snags with trouble finding tenants.

Market conditions such as inventory levels, mortgage rates, and seasonal trends can also play a role in figuring out whether it's time to part ways with your investment. When there's low inventory and high demand, you'll find it easier to find a buyer and a strong offer.

While no one can predict the real estate market with 100% accuracy, some experts believe 2025 housing prices will likely increase.

You no longer want landlord responsibilities

Being a landlord might have lost its luster. You may no longer have the time or energy to deal with day-to-day maintenance, inspecting properties, and handling tenant requests.

If you're on the fence about selling your home, you could hire a property management company. Property managers can handle everything from collecting rent, serving as a go-between between owners and renters, dealing with insurance policies, and handling maintenance and repair requests.

It's another expense that can impact cash flow and can cost you about 8% to 12% of the monthly rent collected, with 10% being the usual rate. If you go this route, you'll want to make sure you can handle the additional costs.

Your investment strategy has changed

It could be that you're retiring, relocating, researching estate planning, or rebalancing your portfolio. Or, maybe other appealing real estate investing opportunities have presented themselves to you. If so, you might be keen on using the proceeds of your house sale for your next pursuit, and exiting rental property ownership may be a better fit.

Other important financial factors for sellers

Besides the main ones we just covered, there are other key financial factors you should mull over before landing on your decision:

• Mortgage payoff amount. When you sell your house, another thing to consider is to check the mortgage payoff amount. You can find this on the mortgage payoff statement. When you compare your mortgage payoff amount to your current home value, this will show you how much you stand to gain or lose after paying off the remaining mortgage amount.
• Closing costs and commissions. If you decide to sell you property you will have closing costs. Closing costs usually are 3% to 6% of your loan amount. There are also realtor commission fees, which can eat up another 5% to 6%, and is split between the buyer's agent and the seller's agent.
• Capital gains taxes. When you sell an investment home for more than you paid for it, you're on the hook for capital gains taxes on your rental property.

How to sell your rental property

If you're leaning toward selling your rental property, the selling process depends on whether your rental property is vacant or has tenants. Let's take a look.

When your property is vacant

Selling a tenant-free rental property is like selling a regular home. You’ll need to go through the general steps, like preparing the home for listing, making any needed repairs so issues don't pop up during the inspection, and finding the right buyer to close the sale.

If you decide to make home improvements before you put it up for sale, you can scoop up a tax deduction from capital improvements when you sell your home. However, note that the upgrades need to be permanent, they adapt the property to new uses and give it a boost in value.

When you have tenants

Selling a rental with tenants is more complex because of the legal and practical considerations.

You'll want to meet the terms in the lease agreement, such as giving proper and sufficient notification for the tenants, meeting any required timelines and conditions, and following specific processes. For example, you might need to provide the tenants a relocation fee or relocation assistance.

There's also the possibility of finding an investor who is interested in buying a house with tenants in place.

FAQ

Here are some answers to common questions and answers about selling your rental property to help you make a choice that considers your particular circumstances.

Should I sell my rental property if the market is down?

When you sell your rental property in a down market, you can expect less demand and a dip in home prices. Discuss the factors to consider when considering selling in a down market, acknowledging that some things can change, so waiting might make sense. You can check housing market indicators to assess whether to sell or keep your home.

When is the best time to sell a rental property?

If you’re having problems keeping long-term clients or maintenance costs are rocketing, it may be a good time to sell. This will also depend on your personal finances. Maybe your investment strategy has changed, or you're undergoing a life transition, and you feel that your rental is bogging you down.

How long should I keep an investment property?

You’ll want to keep an investment property for at least one year. That's because you'll be able to steer clear of higher short-term capital gains taxes. After that point, how long you want to hold onto it hinges on your own situation and unique preferences.

What can I deduct when I sell my rental property?

There are many tax benefits for owning a rental property. When you sell your property, you can deduct things like real estate commissions and other costs related to selling, which may also reduce your capital gains taxes. Check with a tax advisor to make sure you understand what deductions you can take.

Can I avoid capital gains taxes on my rental property sale?

It is possible to defer or avoid capital gains taxes on investment property sales by reinvesting the proceeds into another investment property. How much you owe on capital gains taxes hinges on how long you've owned the property.

If you own the property for more than a year, you'll qualify for lower long-term capital gains tax rates, which can be anywhere from 0% to 20%. If you sell your home before the one-year mark, it might mean higher taxes on your profits since they’d be classified as short-term capital gains.

The bottom line: Carefully consider all factors before listing your investment property

Deciding whether to sell your rental property is no simple decision. You'll want to look at all factors and consider the current market, your reason for selling, and the pluses and minuses with the decision.

Thinking about buying another property? Consider applying for a loan through Rocket Mortgage^®.