Let me share when is the best time to sell rental property with a logical framework. As a rental property owner since 2003, real estate is my favorite asset class to build wealth.

On the one hand, owning rental property is a great way to build wealth. Rents generally go up over time, along with real estate prices. In an inflationary environment, like the one we’re in right now, owning rental properties is a smart move.

On the other hand, owning physical rental properties can sometimes be a real pain to manage. Maintenance and tenant issues pop up all the time. The more you value your time and sanity, the less you will enjoy owning rental property.

Therefore, the best time to sell rental property may be when you’re simply too sick and tired of managing it. However, making an emotional decision is generally not the best strategy for wealth maximization.

The Dilemma To Sell Rental Property Or Hold

“Should I Sell My Rental Property And Simplify Life?” was written in frustration due to unnecessary conflict between my tenants and their downstairs neighbor. I’ve had some time to think more objectively about the incident. I also talked to a couple older landlords to come to a more rational decision.

When I had no online income, real estate income was by far my favorite income stream. Now that my online income has grown, I’m becoming obsessed with the idea of being as unencumbered as possible to make money. I’ve compared rental income with online income, and online income has more upside.

Early retirees become totally spoiled with our time because we never have answer to anybody. So when we have to do something that’s unpleasant, such as play peace keeper, we get very bummed out. (Read: “What Does Early Retirement Feel Like? The Positives And Negatives“)

As you know from previous articles, I spend an exorbitant amount of time doing research on anything that has large financial consequences. I calculate various scenarios, talk to friends and family, and speak to as many industry veterans as I can find.

After consulting with several 60+ year old rental property owners who’ve owned their properties for over 30 years and comparing notes, I’ve come up with five tangible reasons to determine the best time to sell rental property.

Math not emotion is what’s going to help make the best financial choices!

Best Times To Sell Rental Property

The base case assumption is that we should own our property forever. Rents will continue to rise due to population growth and inflation, while land is finite. Every time I think about selling a piece of property to simplify life, I think about how I’ll be kicking myself 10, 15, 20, 25 years from now for selling so cheap. Just think back to where rents or property prices were just 10 years ago and I’m sure you’d agree.

Real estate almost always seems expensive at the time of purchase because real estate is almost always the largest asset you’ll buy in your life time. Unless you’re really disciplined by buying below your means, you’ll generally tend to buy what you can afford or stretch to the max instead.

As we get older and hopefully wealthier, time becomes more of a premium over money. Rental property is the most active of my passive income streams, but the ideal scenario is to earn lots of money and seriously do nothing at all. The problem with totally inactive money is that CD returns are too low while stocks and bonds can turn violent in any given year.

If we can’t hold onto the property forever by at least hiring a property manager for one month’s rent as pay, then let’s look at the five best times to sell rental property.

1) When your depreciation benefit runs out.

One of the best times to sell rental property is when depreciation benefits run out. Depreciation is a non-cash expense which every rental property owner can take. You can usually either accelerate your depreciation or straight-line depreciation. The most common form of depreciation is the straight-line depreciation method which is taken of an IRS instituted 27.5 years.

Formula:

1. Purchase price – Land Value = Building Value.
2. Building Value / 27.5 = Annual allowable depreciation deduction.

Example:

1. $500,000 purchase price – $200,000 land value = $300,000 building value

2. $300,000 building value / 27.5 = $10,909 annual allowable depreciation deduction.

3. Current annual rental income is $20,000 (4% gross rental yield).

4. Taxable rental income if we include no other costs like property tax, maintenance, and HOA costs for simplicity purposes = $20,000 – 10,909 = $9,091.

5. Total tax savings if you are in the 25% federal tax bracket = $10,909 X 0.25 = $2,727.

Depreciation Doesn’t Last forever

Deprecation expense is all about saving on taxes. You may be able to select accelerated depreciation instead, which basically front loads the depreciation costs to get a bigger deduction. Best to check with your accountant and state laws. Here is the IRS page on depreciation which doesn’t do a very good job explaining because it is so damn long and confusing!

The depreciation criteria basically states that you should aim to hold on to your property for the amount of years you are allowed to depreciate. While I was in the 36% federal tax bracket (39.6% current equivalent), I maximized depreciation and all my rental expenses. As a result, I was making a net loss on my main rental property. Now that I’ve started a company and make less reported income, I’m much more willing to earn income from my rental given my lower tax bracket.

It’s important to note that depreciation amounts get adjusted back during time of sale (aka depreciation recapture). For example, if you took 20 years of depreciation at $10,909 a year, you would reduce your cost basis of the $500,000 purchase price by $218,180 (10 X $10,909) = $281,820.

With a lower cost basis, you would pay more taxes due to a higher difference in sales price vs. adjusted cost basis. Depreciation isn’t free money in the end. This is why you need to be proactive in your estate and tax planning.

One final point. Once you exceed ~$160k AGI (married filing jointly) you lose all rental losses as rental is considered a passive activity. You still accumulate the Net Operating Losses until you dispose of the property, or when your income is below that threshold. But you will not get any tax benefit on an annual basis. Hence, when it’s time to sell, make sure you make less than $160K.

3) When you can tap your 401(k) or IRA at age 59.5. 

Another good time to sell rental property is when you can finally tap your tax-advantage retirement accounts without penalty.

By age 59.5, hopefully everyone will have amassed a healthy chunk of wealth in their 401(k) or IRAs. Please see “How Much Should I Have In My 401(k) By Age” and “How Much Should I Have Saved In My IRA By Age” for some progress guidelines. The idea is to receive the income and taxation benefits of a rental property until the age where you can withdraw from your 401(k) or IRA penalty free.

As of now, there is a 10% early withdrawal fee on your 401(k) or IRA. The idea is to let your money compound over time. Prevent the temptation to spend your money now.

A perfect time to buy rental property is therefore around the age of 32 due to the 27.5 years of straight-line depreciation. By the time you are 59.5, you can probably sell your rental property for a handsome profit. You can also start taking penalty free withdrawals from your 401(k) and IRA and live a carefree life!

3) When you can begin collecting Social Security and Medicare.

You’re welcome to delay the sale of your rental property if you can hold out long enough for Social Security. The earliest you can currently start accepting Social Security is age 62. I’d be more conservative and expect the earliest age to accept to increase to 65 by the time you retire.

Receiving rental property income while receiving distributions from your 401(k) and IRA for the next two to five years isn’t a bad idea after age 59.5. By 65, I’m sure most of us will really want to simplify life. If I’m thinking of simplifying life after 10 years of rental property ownership, I know I’ll be longing for a simpler life 30 years from now!

Here is the ideal age to take Social Security. Finally being able to collect Social Security relieves income stress. It’s automatic and guaranteed. Therefore, you can feel better selling your rental properties.

The average Social Security benefit is about $1,200 a month. However, the maximum Social Security benefit is around $3,100. That income can replace a good amount of rentals.

4) When there’s an easier way to own rental property

The main reason why I sold a rental property in 2017 was because I was becoming a first-time father. I didn’t want to have the stress of owning this rental property weigh over me. The rental property had constant turnover due to having 4-5 roommates who always threw house parties.

After selling the property, I reinvested $550,000 of the proceeds in real estate crowdfunding. Platforms like Fundrise make it easy to invest in private real estate across the country. I transferred capital from expensive San Francisco, to faster-growing and cheaper cities like Austin and Memphis.

Thanks to technology and the work from home trend, I believe more people will relocate to 18-hour cities to save money. As these 18-hour cities attract more people, they will grow their infrastructure and attractions as well.

The older and wealthier you get, the more you want to simplify life. Diversifying your property holdings and earning more passive income are great moves. Personally, I’ve invested $810,000 in real estate crowdfunding since 2016 and have received almost $500,000 in distributions.

5) When cap rates are no longer attractive

If there is a lot of inventory coming to the market and the cap rate premium over the risk-free rate of return is not sufficient, you may want to sell your rental property. The cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value.

For example, let’s say your property trades at a cap rate of 3%. It’s appreciated handsomely over the past 10 years by 110%. Meanwhile, the 10-year bond yield is at 2.5%. Is the 0.5% premium over the 10-year bond yield worth the headache of owning your rental property? Maybe not.

It may be better to sell your rental property and reinvest the proceeds in other cities with higher cap rates. Cap rates in the heartland are easily above 5%. Some go as high as 8% – 10%.

When it comes to real estate investing, consider following my BURL Strategy. In other words, Buy Utility, Rent Luxury. It is one of the best real estate investing rules to follow.

Own Your Rental Property For As Long As Possible

Rental property should be a core part of anybody’s passive income stream portfolio. Read “Net Worth Allocation Recommendation By Age And Work Experience.” You’ve essentially got two parts offense that makes up 60-70% of your net worth, and one part defense (CDs) which can turn to offense when buying opportunities arise.

There will come a point in every rental property owner’s life where they just don’t want to deal with even a innocuous e-mail inquiry from a tenant anymore. Although I’m only in my mid-40s, I’m living more like a typical empty nest 65 year old retiree.

I’m still considering selling one rental property before I relocate to Hawaii. However, now that there are exact ownership targets (the number of depreciation years left, age 59.5, and age 62), I’m going to do my best to own until my depreciation runs out. Building passive income really is like a game and I love this newfound challenge!

Invest In Passive Real Estate To Live More Free

Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile.

As I’ve gotten older and wealthier, my time and patience for dealing with physical rental properties has declined. As a result, I’ve invested more of my real estate assets into private real estate funds for more hands-off investing.

Take a look at Fundrise, my favorite real estate investing platforms today. Fundrise began in 2012 and is the creator of private eREITs. Fundrise primarily invests in single-family and multi-family properties across the Sunbelt, where valuations are lower and yields are higher.

When I sold one rental property, I reinvested $550,000 of the proceeds in private real estate. It’s been great earning income 100% passively without having to deal with tenants! Currently, my real estate investments account for roughly 50% of my current passive income of ~$300,000. 

When Is The Best Time To Sell Rental Property? is a Financial Samurai original post. We’re currently in the ideal environment for real estate investors. Take advantage, especially before foreign real estate investors start buying up our property as Covid restrictions get lifted.

Between 2000 – 2009, the average homeownership duration was only about four-to-five years. It was too short to build real wealth. As of 2022, the average homeownership duration has risen to roughly 10.5 – 13 years according to First American Data & Analytics and Redfin.

Post-pandemic, people are simply owning their homes for longer because we’re utilizing our homes more. Further, more people are investing in real estate for passive income and their retirement needs.

According to the US Census Bureau, only 37 percent of Americans have lived in their homes for more than 10 years. This is unfortunate, because in order to generate real wealth from real estate, you need to own your property for as long as possible.

A home inspection contingency is generally recommended for all homebuyers. With a home inspection contingency, you get to thoroughly examine what could be wrong with the home before closing escrow.

Perhaps just as important, a home inspection contingency enables you to back out of a deal if you find something you don’t like. It’s like a get out of jail free card. At the very least, you can use the home inspection to knock down the asking price.

There’s just one problem. In a competitive real estate market, putting in a home inspection contingency is often a deal killer. Sellers want as few contingencies as possible, which often includes waving the financing contingency. The fewer the contingencies, usually, the stronger the buyer. And the stronger the buyer, usually, the higher the chance a deal will go through.

In my price concession letter post, I had written that I had waived home inspection contingencies for my last two property purchases. Come to think of it, I waived the home inspection contingency for the fixer I purchased in 2014 as well. As a fixer, I already had the intention of gut remodeling the home.

Let me share why I waived the contingency and why you might be OK waiving it too.

Getting a great deal on a house has a lot to do with good negotiating. Unlike investing in stocks, where you have no ability to affect prices, a savvy real estate investor can make a difference. And one of the negotiating tactics to consider is writing a price concession letter. A price concession letter asks the seller to lower their asking price usually once in contract.

A price concession letter is almost like the opposite of a real estate love letter, which tries to convince the seller you are the ideal candidate. Once in contract, no seller wants to get a price concession letter. However, as a buyer who might be struggling with uncertainty, such a letter may help you follow through with the transaction.

The price concession letter can either be friendly or threatening. The tone of the letter will depend on how ruthless or scared you are. I highly recommend writing a more collaborative letter. Holding the seller hostage is a last resort tactic.

For my last two property purchases, I’ve written price concession letters in order to get the best price possible. The first letter was written after discovering more remodeling issues. The second letter was written out of fear since we were in the beginning of a pandemic.

Recently, I’ve been thinking more about how climate change may positively or negatively affect real estate values. With seemingly more fires and longer droughts here in California, I’ve begun to think more strategically about where to buy real estate.

If you are planning on investing in real estate and passing down your real estate holdings to your children, then it’s worth thinking about how climate change may affect real estate values in the future.

I realized the other day that every single one of my properties is on a hill. I didn’t purposefully go out and hunt for properties on a hill. It just happened that way. I love views, especially ocean views because it provides a calming effect.

The only property I owned that wasn’t on a hill was sold in 2017. Maybe subconsciously, the reason for the sale wasn’t due to the hassle of being a landlord. It was because I felt uncomfortable being so close to sea level. Or perhaps it was due to my dislike of facing another building.

Owning Real Estate With Good Feng Shui

As a real estate enthusiastic, one of my main criteria for owning property is that it must have good feng shui. And one aspect of good feng shui is having a pleasant view. When you enter a property, you can just feel the positive or negative feng shui. A lot of the feel has to do with light, direction, sound, and layout.

Besides, having a view gives a property a unique competitive advantage. Views make properties more desirable. And the more unique and desirable the property, the better it will hold its value or appreciate over time.

Given it’s human nature to want what you can’t have, I decided to set my sights on acquiring a beachfront or close to beachfront property in Hawaii for my ultimate retirement home.

I dreamed of being able to step onto my ocean-facing deck and feel the sea breeze on my face every morning. While doing my morning stretches, I wanted to smell the ocean, especially now that rolling lockdowns will likely become the norm.

In my search, I found a couple of “affordable” beachfront properties in Honolulu that needed remodeling. Then I was reminded by readers, my father, and by several natural disasters that perhaps owning a beachfront property is not a great idea long-term.

Let’s take a glimpse at how climate change affects real estate investing.

For most people, real estate will always be more desirable than stocks. Real estate is a tangible asset that provides shelter, utility, and rental income. Everybody can easily understand the fundamentals of real estate, which is why many prefer real estate over stocks.

Stocks, on the other hand, provide no utility. You can’t enjoy your stocks or raise a family in stocks. Further, a stock’s value can disappear overnight. Look at the recent devastation of many high-growth tech stocks in 2022. Companies like Meta, Peloton, Moderna, Teledoc, and many more have given back 1-2 years worth of gains in a matter of months.

In this article, I will share why real estate will likely build you more wealth over time. Real estate will also most likely provide more happiness. Owning an asset that provides more wealth and happiness is tough to beat!

I’m all for owning both real estate and stocks to build wealth. However, I’ve noticed there’s been a growing amount of rage against homeowners and real estate investors. This rage is misplaced and should be rectified if these folks want to build greater wealth over the long run.

Over the past 10 years, there’s been a growing number of voices saying that owning real estate is a terrible way to build wealth. Some are even rooting for real estate investors to lose money.

Curiously, you don’t see this type of schadenfreude and rage against renters or stockholders by homeowners. I want to address this issue full on so you can make better financial decisions.

Are you interested in owning beachfront property? I was for many years, but no longer. Climate change is negatively affecting beachfront property. And as an investor, I don’t want to take that risk.

Before you plunk a large chunk of change on a villa by the sea, it’s worth understanding the downsides. The biggest problem with beachfront property is also what makes it so special: the ocean.

Real estate is my favorite asset class to build wealth because you can also enjoy it. Can you imagine making millions of dollars on your beachfront property while also living your dream life? I don’t care how much stocks go up if you’re never going to use the proceeds.

However, unless you are able to get a steal, beachfront property may have a more difficult time appreciating in the future.

To come up with a proper 2022 housing market forecast, it’s important to first forecast where the 10-year bond yield is heading. The 10-year bond yield is the most important indicator for mortgage rates, not the Fed Funds rate. And mortgage rates, along with new household formation, job and income growth are the biggest factors for housing price growth.

I believe we are in a permanently low interest rate environment. Therefore, even with the Fed expected to raise the Fed Funds rate six times in 2022, I still believe the 10-year bond rate won’t rise much above 2%. Although it is at 2.75% now as of April 11!

Instead, the yield curve will likely get flatter as the short end goes up and the long end barely moves higher, if at all. For 2022, I forecast the 10-year bond yield will hover between 1.75% – 2.25% for the vast majority of the time. As a result, I predict the average mortgage rate will only increase by about 0.5%. We’re talking about 4.25% for the average 30-year fixed-rate mortgage for 2022.

If you have a choice between believing the seven Board of Governors of the Federal Reserve System or the $46+ trillion U.S. bond market, go with the latter. The Board of Governors are nominated officials who make mistakes just as much as anyone.

They are sometimes too ahead of the curve or too behind the curve, which ultimately helps create boom and bust cycles. Part of the reason why inflation and risk assets are so elevated is that the Fed was too accommodating for too long.