Ok, so you have gone out and done the hard part…You purchased rental properties and now you may be asking yourself when is the right time to sell.
This is one of the most common questions that I am asked by seasoned investors. Honestly, it is a question I will ask others on occasion. The reason being, the answer is not usually black and white.
So let’s talk through 3 reasons why it would make sense to sell your property and 3 reasons why you should NOT sell your property.
Fair enough?
Here we go:
Top 3 reasons why you SHOULD consider selling your investment property:
You feel your property has peaked or leveled off.
Similar to going to the gym and using the same workout plan every week…Eventually the results taper off and you plateau. It happens to everyone. Maybe you purchased the property with the expectation of appreciation in both rental rate and equity. And sure enough, the market cooperated and your projection came true. However, after 4-5 years of rent that have leveled off and minimal appreciation, while it still has a solid return, you may be able to find other properties that will force your money to work harder for you.
The location has started to deteriorate along with the property.
What once was a borderline B class neighborhood is now a C class neighborhood for various reasons and it is harder to find quality tenants to maintain your property. Maybe school ratings have gone down and crime has gone up. Time to sell.
You have the opportunity to replace your property with a much stronger and exciting prospective property.
You could potentially sell your property, and use that equity to go and purchase 3 rental properties in another location…Hence this is why I ended up in Tennessee & Georgia vs Arizona…The opportunity to buy cash flowing properties with a large runway for equity proved to be too enticing.
Speaking of replacement opportunities…This is a great time to bring up 1031 exchanges…That is essentially a tax code that says if you sell your investment property and replace it with another property with those funds (instead of going out and buying a new corvette) the government will allow you to push those taxes off on the gains and keep rolling those profits into better and better properties.
The investors I work with who are perpetually utilizing 1031 exchanges are the most savvy and highest net worth clients out there. Reason being: They have more buying power & this forces them to plan out their next purchase. They are always looking for ways to IMPROVE their cash flow and make sure their investments are working as hard as possible for them.
Click here to view our article for a more indepth review of 1031 Exchange.
Huge fan.
Top 3 reasons why you SHOULD NOT sell your property:
Politics & market predictions.
If someone tells me they want to sell their portfolio because they are concerned the market is going to go in the tank if another politcial opponent gets elected or they have a gut feeling the market is going to crash…I stop listening to every word that comes out of your mouth after you say either of those two things. Sorry. I have seen that excuse fall flat on it’s face…Every single year I have been in real estate.
Emotional selling.
My rental property had a lot of repairs this year so I am done with it, or the market only appreciated by 5% this year instead of 15% the last two years…It’s hit it’s peak. These are emotional reasons for selling.
Chasing the equity high.
One of the hardest things to do as a real estate investor is not allowing yourself to get lured into selling because your property has appreciated and you get a “CRAZY” offer. Generally, the most appealing rental properties in great locations appreciate the most and therefore get the most attention from other investors and unsolicited offers from envious neighbors. Back to the 1031 sellers…If you have a plan to utilize that cash with another property that outperforms the performance of this home, by all means, you should consider that crazy offer.
Otherwise, you are being impulsive. Call me up and ask me if you should sell it and I will help talk you off the cliff…Or give you a push if I feel there are other opportunities out there similar to it and it truly is a crazy offer.
Bottom line…Sell an investment property if you can increase it’s performance, you have a plan, and you utilize every tax incentive out there in order to keep as much money in your bank account.
And stop selling off of emotion. “If you cannot control your emotions, you cannot control your money” Warren Buffett
Take care of your investments and they will take care of you and your family for generations.
BJ Gremillion
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