In August I was contacted by an unusually large number of investors who are considering selling their investment property. Some of the investors think the market is nearing a top while others have decided being a landlord isn’t for them. If you are thinking about selling your investment property here are a few things to think about.
Do you want to be a landlord? I believe successful investors enjoy owning investment properties and they run their investment properties like a business. If you don’t enjoy some of the negative aspects of owning rental properties such as dealing with tenants or having to lease a home then being a real estate investor may not be right for you.
What is your actual Return on Investment? When calculating a ROI many investors will simply compare the difference between the rents collected and the mortgage payment. Often this calculation leaves out weeks of not collecting rent when the home was being leased, management and leasing fees, necessary repairs and make ready costs. When calculating your ROI be sure to include those expenses.
Have the rental rates kept up with the property value? We have seen some tremendous appreciation in home values over the last several years. Many areas have not seen a corresponding increase in rental rates. If you have a tenant vacating your home after a long period you may be surprised that the rental rates may not have increased and in some areas may be lower than a few years ago.
What else can you do with your money? Owning an investment property can be a great way to build wealth. However some homes are better than others when it comes to being a profitable investment. Every year you should evaluate all your investments and compare them to other options available that might be more profitable. This is especially true for investors who have built up a large amount of equity in their homes causing the ROI to be low compared to more passive investments.
What expenses are coming up? Are you facing major expenses on the horizon? Those expenses may eat up all your profits very quickly. The upside of holding on to an investment property for a couple more years can easily be lost if you are faced with expensive items to replace.
Are you facing the capital gain tax deadline? If you can still qualify for the capital gains exclusion and don’t plan to hold the property for the long term you should consider the expected appreciation vs. additional taxes you may have to pay.
Do you need to get the home show ready anyway? Perhaps your last tenant has moved out causing damage and you are now faced with an expensive make ready. Since you will need to spend money to make the home show ready if you continue to rent or sell this may be a good time to consider selling. Otherwise if your plan is to hold the home for another year or two at that time you may be faced with more of the same expenses if your tenant causes damage to the property.
We are real estate investors and ask ourselves these questions about our homes every year.