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When Should You Sell Your Investment Property?

February 15, 2024 5-minute read

Author: Patrick Russo

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The question of when to sell rental property is one that real estate investors ask every day. While many believe the critical factor is the timing of the real estate market, there are several technical and personal factors you must consider as well. Below, we'll cover the most valuable signs of when to sell your rental property so you can get the biggest bang for your buck.

4 Signs It's Time To Sell Your Rental Property

The timing of the real estate market isn't the only sign you need to consider when deciding whether to sell. Reviewing the financial metrics of the property itself, such as the real estate cap rate or your own financial goals, are essential to making the right decision. Follow along to learn four of the most important factors to consider.

1. Loss Of Positive Cash Flow

Your investment's cash flow is the cash transferred in and out of the property. If the property's outflows (the money spent on expenses like insurance, taxes and repairs) are greater than its inflows (the money you make from rent) it might be time to sell.

The time to consider selling is when the investment shifts from consistently positive to consistently negative cash flows. If the cost of repairs or a changing market (more on these below) forces you to spend too much on maintenance or keeping the property rented, the property may be more valuable as an asset to sell rather than one to bring in consistent income.

2. The Need For Costly Repairs

The need for expensive repairs is one of the most common rental property issues that can skyrocket your inflows and lead to negative cash flows. On the bright side, some repairs or renovations can attract renters at a higher price. However, constantly dealing with pesky repairs can scare renters away and leave you with hefty bills to pay with no rental income.

If you're trying to decide whether to spend on repairs or sell your rental property, determine your real estate investing ROI before you make the final decision. To calculate the ROI for a rental property, subtract your annual operating costs from your annual rental income and divide it by the amount you still owe on your mortgage. Using this calculation, it may be time to sell if the repairs cause your ROI to go too low or even dip into the negatives.

3. Shifting Market Conditions

Not all reasons to sell your rental property have to be negative. If market conditions send the value of your property skyrocketing, it may be a wise move to take advantage of the hot market and sell the home for a significant profit. If the housing supply is low and demand is high, the market is perfect for both you and your potential buyer. With less competition in the market, you'll be able to sell at the highest possible price. Even with these high prices, the high demand for housing means that your buyer should be able to find renters easily, making the deal a win-win for everyone involved. Other factors that could increase the value of your home enough to convince you to sell include:

  • Low interest rates
  • Favorable mortgage lending terms
  • Positive local and national economic indicators

4. Growing Investments

So, you bought a house for a great price, renovated it, found reliable renters and held it for a few years to collect the profit and allow it to appreciate. This passive income may sound like the end goal, but for many investors, it’s a sign that you're ready for the next adventure. But what if you don't have enough liquid capital to buy your next investment? Selling a rental property for a profit is an excellent way to get cash to fund your next bigger and better investment.

Remember that your next deal doesn't have to be another rental property. Many types of real estate investments will allow you to diversify your portfolio and make even greater profits in the long run.

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Weighing The Financials

There are some additional financial factors that you should consider before selling:

  • Capital gains tax and other taxes: The profit you receive from selling your rental property will be taxed as a capital gain, usually at a rate of 15%, unless you’ve owned the property for less than a year. You may also have to pay transfer taxes depending on the local jurisdiction the property is in.
  • Closing costs and real estate commissions: While the buyer typically pays most closing costs, sellers often pay more because they typically pay both the buyer's and seller's real estate agent commissions which usually costs about 6% of the selling price.
  • Mortgage loan payoff amounts: Your loan payoff, the amount you have to pay your lender after the sale to fully pay off the mortgage, may differ from your current balance. Talk to your lender to see if there are additional fees or interest payments that you must make to completely pay off your debt.

How To Sell Your Rental Property

Selling your rental property is similar to your primary residence, with one key difference. Whether you have tenants still living in the property can make or break a sale.

Selling A Property With Tenants

It is possible to sell your rental property with existing tenants still living in it, but there may be extra steps to follow. While selling your property with tenants can seem more complicated, there are certain situations in which your tenants could make the sale much easier. If your tenants love living in the home, you could always offer to sell it directly to them. If they can't afford to buy the property but wish to remain there, you could focus on finding a fellow real estate investor who would welcome reliable tenants already living in the home, saving them the hassle of finding replacements.

Selling A Vacant Property

Selling a vacant rental property is much more straightforward than selling one with existing tenants. To ensure the home is in top shape to show to potential buyers, it may be wise to make quick repairs to anything that may be flagged during a home inspection. Structural issues to the roof or foundation of the home can ruin a potential sale after months of searching for the right buyer, so dealing with these issues ahead of time can save you lots of time and stress. These home improvements may even be tax-deductible.

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When To Sell Rental Property FAQs

Below are some of the most common questions about when to sell a rental property.

When is the best time to sell rental property?

When to sell a rental property is determined by the current market conditions, the condition of the property and your investment goals. While it is difficult to time the sale of your home to perfectly take advantage of market conditions, it is easier to assess your own financial situation to determine whether selling your rental property will allow you to achieve your desired next step.

How long should I keep an investment property?

Generally, it is best to wait at least a year after you purchase a property to sell it. If you sell it in less than a year, you will have to pay short-term capital gains taxes that may be higher than the long-term rate you would pay if you sell it after a year. After a year, how much longer you should keep the investment property largely depends on your personal preference.

How do I know it's time to sell my property?

There are multiple factors and metrics to consider when deciding when to sell your property. As mentioned above, the property's cash flow, management headaches such as expensive repairs, current and future market conditions and your own investment goals are all crucial factors.

The Bottom Line

Four of the most important factors to consider when deciding to sell your rental property are cash flow, cost of repairs, real estate market conditions and your personal investment goals. Once you're ready to sell, keep your current tenants in mind, along with the additional selling costs, such as taxes. If you're prepared to buy an investment property, start the mortgage process today.

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Patrick Russo

Patrick is a writer and researcher with expertise in real estate and insurance. When he is not writing, you can find him hanging out with his family and friends or walking around Washington, DC, listening to an audiobook.