Are you wondering when to sell an investment property? If so, you’ve come to the right place. I have owned investment properties since 2003 and I’ve also sold an investment property before.
I believe the best holding period for real estate is forever. By not selling, real estate owners ride the unstoppable inflation wave, which has increased since the pandemic began. Inflation is running around 7%, which is pretty incredible. Inflation helps boost rents and property prices.
Further, by holding onto your real estate forever, you never have to pay any onerous commissions and long term capital gains tax. Selling commissions are still stubbornly high. But forever is a long time.
10 years ago, I had the mindset of buying as many investment properties as possible. I wanted to generate enough rental income to never have to work a day job again. I was enamored with using other people’s money to buy a real asset that tended to appreciate in value over time.
Further, I loved receiving a steady rental income stream. I used the money to pay down my mortgage and invest. To capture 100% of economic benefits with only a 20% down payment felt too good to be true. Therefore, I pressed as hard as I could.
Today, as a father, I no longer have the same tolerance for dealing with tenants and maintenance issues. Which is why I invest in passive private real estate now. Funny how our attitudes change as we age. Don’t believe for one second your attitudes about work, life, and money won’t change either.
After a tremendous run up in property prices, I’ve noticed more people starting to inquire when to sell. As for your primary residence, please try to hold on for as long as possible. If you are a renter, this post will give you a good idea of the seller’s mindset when it’s your turn to finally buy.
When To Sell An Investment Property
Here are all the considerations for when to sell an investment property. Sometimes, selling is better to simplify life and earn a higher rate of return elsewhere.
1) When you have a major life event.
There are some key life events that warrant the re-evaluation of owning investment properties: a new family member, a death in the family, a terrible accident that requires extra care, an unwanted layoff, or a job relocation to name a few.
Major life events may require more of your time or money. If you’re unable to work, some life events may necessitate that you keep your rental property for semi-passive income.
In 2017, my first son was born. As a result, I decided to sell one of my main rental properties because I wanted to focus on fatherhood. It was a four-bedroom house with rowdy tenants I no longer wanted to deal with.
After selling the investment property, I reinvested $550,000 of the proceeds into passive investments. Winning back time was important, while also riding the inflation bull market.
2) When you have greater sources of passive income.
Besides rental income, there’s dividend income, bond income, REIT income, real estate crowdfunding income, P2P income, CD income, and royalty income. It’s important to have a diversified passive income stream because you never know which asset class may get pounded and which asset class will flourish. For your review, I’ve conveniently ranked the best sources of passive income in the chart below.
With an activity score of 6 (10 being the best with the least amount of activity required), rental property is the passive income stream that requires the most amount of activity.
This is fine if you compare rental income to day job income (activity score 1). But if you have other sources of passive income that generate just as much or more, then real estate becomes less optimal. Here are my passive income investments ranked.
In my case, I never anticipated my online business to grow to multiple times my rental property net income. Just my severance negotiation book sales alone generate more passive income than my $1,000,000 Pacific Heights 2/2 condo rental with zero work required.
Online income is far superior to rental income once it gets going due to no maintenance, no property tax, no tenants to deal with, and unlimited scale.
3) When your cap rate is below the risk free rate of return.
Think of a cap rate as your net rental yield. Cap rate can be calculated as Net Operating Income / Value Of Property. NOI is calculated by subtracting all expenses from gross rental income. If the cap rate is below what you can earn in a risk-free 10-year Treasury bond doing nothing, you should consider selling because you’re not being adequately compensated for the risk you are taking.
My house’s gross rental income is ~$100,000 a year. Its NOI is roughly $75,000. My cap rate on my purchase price of $1,525,000 is therefore 4.93%. Not bad, given it’s much higher than the risk free rate of return. However, my cap rate on the current market value is only about 2.7%.
If I were to spend $9,000 a year on a property manager, which is what I think is required to find a premium renter and keep my sanity, my cap rate falls to only 2.4% based on today’s market price. Now if you add on my $20,000 a year in mortgage interest cost, my net rental yield is even lower.
Places like San Francisco, Hong Kong, London, and New York City have had low cap rates for decades because investors have banked on principal appreciation. Foreign real estate investors love American coastal city markets. Frankly, the pandemic has throttled foreign real estate demand. But foreigners are set to come back to the U.S. in droves.
However, as the world becomes more connected due to technology, I forecast cap rates to also come down in 18-hour cities, where valuations are lower. 18-hour cities are beneficiaries of positive migration trends. Work from home is here to stay!
4) When you can BURL like a champ.
BURL = Buy Utility, Rent Luxury. If you’re able to easily allocate capital towards investment properties that trade at low gross annual rent multiples (high cap rate) to generate tremendous cash flow to pay for a rental property in an amazing location that trades at a high gross annual earnings multiple (low cap rate), then you should go for it.
This arbitrage is one of the best lifestyle and money hacks I’ve come up with.
5) When the joy of owning is less than the joy of doing something else more important.
The more money you make, the less joy you will experience collecting rental income. It’s just like eating your fifth slice of apple pie isn’t as enjoyable as your first.
Although rental income accounts for roughly 50% of my total passive income, net rental income accounts for less than 10% of my total income.
While I’ll always feel proud driving by one of my properties, the concurrent joy I also felt has faded. Instead, I now view the properties as pure income generators, without the nostalgic memories. As soon as you can take emotion out of your investments, you become a better investor.
6) When there is a large supply of property in the pipeline.
Real estate price performance is determined largely by the growth in jobs, income, and supply. If you see a large pipeline of condos over the next several years, there will inevitably be downside pricing pressure. The key is to sell before the market gets flooded.
Pricing pressure is always worse once the condos / new homes come on market because people usually underestimate their impact. Here are some cities you should worry about regarding upcoming supply.
7) When homeowners are targeted for excessive tax hikes.
City and State governments love to make homeowners pay for new projects through higher property taxes instead of increasing taxes or fares on patrons.
For example, instead of raising train fares in the SF Bay Area, the government decided to make homeowners pay higher property taxes for the next 10 years to fund a $3.5B train bond. I take the train once every six months because it’s hardly on time.
Although a logical conclusion would be that higher property taxes will lead to higher rents, it often takes time to pass the extra cost to the tenant. If there appears to be no end in sight for ever higher property taxes (NJ, IL, CA residents in particular), it may be time to do a 1031 exchange to a more tax friendly state.
I’m currently paying $21,875 a year in property taxes. That’s a lot! $21,875 is more than some people pay in rent a year.
In contrast, a house valued at $1,890,000 in Honolulu would only pay an annual property tax bill of $5,670, or roughly 1/4th the amount I pay in San Francisco. Therefore, anybody who wants to geo-arbitrage US property taxes should consider buying a retirement home in Hawaii. Hawaii ranks #50 in terms of property tax percentage by state in America, and it’s ranked #1 in terms of quality of life in my opinion.
For homeowners in high cost areas of the country, Joe Biden may be lifting the $10,000 SALT cap deduction. If he does, this will help save homeowners with high incomes and expensive homes a lot of money. Coastal city markets went up since 2020, but underperformed the Sunbelt. I think the price differential will start to change.
8) When real estate commands greater than 50% of your net worth.
I don’t recommend anybody have more than 50% of their net worth in one asset class. This is especially true if debt is used to acquire the asset. As you inch towards financial independence, it’s better to have three or four main asset classes that each count for 25% – 33% of your net worth.
It’s important to have asset classes that zig when others zag. Or have assets that generate income while others crumble. During the financial crisis, many Americans got wiped out because 80%+ of their net worth was tied to their primary residence.
Here’s my favorite net worth allocation chart by age for those with can-do personalities. You can read my other net worth allocation recommendations here.
9) When you begin to exceed the $250K / $500K tax free profit.
The government allows you to pay zero capital gains tax on the first $250K in profits for individuals, and the first $500K in profits for married couples for your primary residence.
If you’re hitting these tax-free limits, and you’re still eligible for benefits if you’ve lived in your home for two out of the last five years, then you may want to consider taking the tax-free profits and buying a new place in a cheaper part of the country with potentially more upside.
To defer taxes, you can 1031 exchange your investment property by buying another investment property of greater value within 180 days. You’ll first have to contact a 1031 exchange company to handle the exchange.
It’ll cost you about $1,000 – $2,000 for the optionality of doing such a transaction. If you can’t find an investment property you like in 180 days, then you’ll eat the $1,000 – $2,000 setup cost.
10) When you’ve found a better use for the proceeds.
If you feel you have a high chance of making a greater return on a different investment with less risk, locking in your gains may be a good idea. For example, after a 100% gain in SF since 2012, I’m thinking it’s a good idea to sell an investment property. I will then redeploy the capital in heartland real estate where valuations are much lower.
By doing this, my property portfolio will become more diversified versus having three properties in SF and one property in Lake Tahoe.
My favorite real estate crowdfunding platforms are Fundrise and CrowdStreet. Both have the best deals and have been around the longest. Both are free to sign up and explore. I invested $810,000 in real estate crowdfunding and have so far earned a ~10% IRR.
Even 3% tax free yielding municipal bonds might appreciate faster than San Francisco real estate if the market flattens or declines.
11) When commission rates become less egregious.
The selling commission rate remains stubbornly high at 5% (2.5% to listing agent, 2.5% to sellers agent aka buyer’s agent). At least the rate has come down from 6% ten years ago. It doesn’t make sense to pay the buyer’s agent a 2.5% fee when the agent is trying to get the best deal possible from you for his client!
The irony is that if commission rates were lower, I would have probably sold one of my properties in 2012, right before the massive surge. There’s so much opportunity for other companies to gain market share by undercutting the traditional competition. The problem is, many realtors will steer their clients away from listings that don’t pay them a 2.5% commission.
Here’s how much it costs to sell a home nowadays. We’re talking roughly 6-7% of the home’s value in selling costs.
12) When there are signs of a commercial real estate slowdown.
Commercial real estate transactions can be seen as a leading indicator for residential housing growth. After all, companies need to first secure space BEFORE hiring a whole bunch of new people.
The coronavirus pandemic has hurt commercial real estate in the hospitality space the most. However, the multifamily space is strong and the single family space is strong too. Single family home supply is down about 40% in 2020, which is helping support prices.
Low mortgage rates are helping support demand for homes as well. Investment properties are significantly undervalued because the value of cash flow has gone way up with interest rates coming way down. Therefore, it may be better to invest in investment properties, not sell them right now as we come out of the pandemic.
13) When there are major upcoming repairs.
Some of the main recurring expenses include a new roof every 10 – 20 years, new paint every 10-20 years, a new HVAC unit every 15-30 years, a new water heater every 10 – 15 years, repairing decks every 20-30 years due to dry rot, and remodeling kitchens and bathrooms every 20-30 years.
You may also have to update old electrical wiring to code. It can cost $10,000 – $50,000 to rewire your entire house. In San Francisco, if you own a multi-unit building over a garage, you may have to spend $100,000 – $300,000 to retrofit the building due to a new law that was past several years ago.
14) Before housing legislation turns for the worst.
Homeowners currently are allowed to deduct interest paid on as much as $750,000 of mortgage debt. The limit was $1 million. With Joe Biden as president, there should hopefully be more housing legislation relief going forward.
There may be a repeal of the SALT deduction limit, which would be a boon for homeowners in more expensive cities and states.
15) If your area is prone to natural disasters.
Certain areas are more prone to natural disasters like hurricanes, earthquakes, flooding, and fires. Study your area’s natural disaster history. For example, almost every 5-10 years there is a massive hurricane that wreaks havoc on the gulf coast. In 2017, that hurricane was Harvey that flooded Houston, Texas.
In 2012, it was Hurricane Sandy. And in 2005, it was Hurricane Katrina. In the San Francisco Bay Area, massive earthquakes have caused great damage every 30-50 years. In recent years, there’s been huge fires in wine country.
If it’s been a while since a natural disaster has struck, maybe you should sell. If you don’t have natural disaster insurance or if you can’t afford the deductible or premiums, you may also want to offload some risk.
Only two out of every 10 homeowners affected by Hurricane Harvey have flood insurance. If you lose your house, only the land value remains. Construction costs are anywhere from $100 – $500/sqft.
Check out PolicyGenius to get better and cheaper homeowners insurance. Input your data and let homeowners insurance careers compete for your business. You get to see all the offers in one place.
Ride The Inflation Wave Until You Can’t Take It Anymore
Owning investment property is like a war of attrition. The longer you can last, the wealthier you will likely be. Some of you will get lucky with amazing tenants that stay for 10+ years. Others will experience situations that will test your faith in humanity.
At the end of the day, your investment property’s main purpose is to generate cash flow in as painless a fashion as possible. Once the pain of owning becomes greater than the joy of earning, it’s time to sell. Continuously work towards that income stream that provides the highest return with the least amount of work.
I have personally sold one investment property and reinvested $550,000 of the proceeds in real estate crowdfunding. I diversified my real estate holdings into cheaper areas with 4X-5X higher cap rates. Further, I’m earning income 100% passively. With a family to take care of now, I no longer have time to maintain a house and manage tenants.
Investment Property Recommendations
If you’re looking to buy an investment property, take a look at Fundrise. Fundrise is one of the largest real estate crowdfunding platforms today.
Fundrise is the pioneer of eREIT funds. eREITs enable retail investors to invest in a diversified portfolio of commercial real estate opportunities. Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.
For accredited investors, I like CrowdStreet because it focuses on real estate opportunities in 18-hour cities where valuations are lower and cap rates are higher. Growth rates tend to be higher as well given more people are relocating to lower-cost areas of the country.
Both platforms are free to sign up and explore. I have personally invested $810,000 in real estate crowdfunding to diversify my expensive SF real estate holdings. Further, I like earning as much passive income as possible so I can spend time with my family.
Take Advantage Of Lower Mortgage Rates Today
Check out Credible, a mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Refinance your primary residence and your investment properties. When banks compete, you win.
For 2022 and beyond, it is tempting to sell your investment property with prices up so much. However, the longer you can hold onto your property, the wealthier you will likely get. Focus on cash flow.
WOW. Thank you for SO much info in this post on selling an investment property. This must have taken a really long time to write! I’ve had some thoughts on selling my investment property, but this year just isn’t the right time. I plan on collecting rent for at least another year and then will reassess with the market conditions. I might have some tenant turnover in the spring, but I hope not. My current tenants are really good and turnover is such a drag. I’m definitely bookmarking this post to reference next year. Thank you!
Hi Sam, greetings from a fellow Californian! I really hope you can help me with some advice, I need to make an important decision about my condo rental property in San Diego. I bought it in 2012 and owe $200,000 on it still, but we bought a house locally last year and I was able to charge $2,100 in monthly rent so I net out about $450 a month after mortgage, taxes, HOA, insurance.
My first tenants have been great, but they move out Feb 1. The market here is hot, and my condo is now worth $440,000 so if I sell it, after closing costs, I’d make a cool $200,000. I always wanted to keep it, but I’m self-managing and the fear of repairs and special assessments (building is from the 80s) is looming hard. In fact, when I calculated my cap rate per your article, I’m only at 1.2%.
I want this as a 20+ year investment for retirement, but my CPA friend suggested: “you can qualify for the $250k tax deduction as you lived in it 2 of the past 5 years, why not sell it and put the $200,000 earnings in an S&P or Nasdaq Index Fund and let it ride?”.
What do you recommend – should I keep the condo and hope appreciation keeps up and rents go up more than my expenses OR should I take the $200k and hope for ~7% average returns via an Index Fund with no stress of managing tenants, repairs, etc? Right now I’m about 50-50 in terms of stocks vs real estate investments.
Thanks so much!
Hi Jessica, getting wealthy is about holding for as long as possible. Fixing things only costs money. It’s not a big deal if you hire someone responsible.
I sold my single family home rental in 2017 b/c I couldn’t take the hassle b/c it was always 5 guys who didn’t treat the property well. But I would have held on if I didn’t have my first child in 2017. You can read my story here.
I did end up investing 1/3rd of my proceeds in stocks, 1/3rd in muni bonds, and 1/3 in real estate crowdfunding to earn income 100% passively. In retrospect, I’m glad I did b/c I simply did not want to deal with tenants in a 4-bedroom house.
A condo should be easier to manage. You can always test the waters in Feb/March first. Create a race. Whoever can rent at X price or sell at Y price wins. This way, you don’t really lose.
Personally, I’d keep it and just keep on investing in expensive equities if you want more exposure.
I really appreciate your prompt reply, Sam. All good points, I guess what concerns me is the anxiety of 25+ years of tenants – having to find new ones, dealing with repair issues, etc. I think I’d either have to give in and use a property manager (who may overcharge for repairs), or leverage my $250k in tax benefits to sell the condo during this high peak.
I like your idea of a race, I can see if I can raise my rent a bit to get a healthier cap rate even. Right now my rental income would barely cover long-term larger repairs, assessments, and HOA hikes so appreciation would be where I’d win more. And I can’t imagine a small condo in San Diego can appreciate as much as 2012-2020 levels in the next 10-20 years. But who knows, that crystal ball sure would come in handy.
Thanks again.
Great info!!!!
I have 3 paid-off rentals in San Antonio Texas, value ~$615,00.00. Cap rate right at 7%.
Been doing this for 13 years and starting to wear on me at age 50.
Ive averaged returns of 13.4% in my IRA over the past 5 years…until now!!!
Is a CR of 7% good? For my area?
I feel I can average over the next 10 years better than a 7% CR by being in the market with my money, thoughts?
Thanks….Glen
Curious about your take on selling a short term vacation rental given the current COVID pandemic. Potential economic downturn and less vacationers might make for a slew of owners jumping ship?
The market is probably locked up. You can try to get out, but it’s probably hard. Vacation properties are unfortunately the worst type of property during times like this.
As you mentioned, it is best to sell a property before there are major repairs that are needed. If there is something that is needed to be repaired, is that something that will be mentioned during the sell? Will that also drive the price down, to factor in the cost of the repair?My parents are looking to sell an apartment complex as the building is starting to get old and needs some upgrades.
Thank you so much for explaining how construction costs tend to be about $500 per square feet. I have been trying to learn more about investing in real estate, and how it could be beneficial for me in the future, or who I should hire for this type of service. Somebody told me that real estate note buyers are in charge of this type of deal, so I will try to contact one and ask them all the questions I have.
In missouri the cost per sq ft is only 140.00
I like what you said about potentially selling an investment property if you gain a new family member. My wife and I are expecting our first child in the next few months, and we want to make sure that we’re financially prepared for their arrival. We’ll be sure to look into our options for selling our investment properties to help with this in the future.
I like how you mentioned that it might be a good idea to sell your house when you have a major life event. My friend told me that he will get divorced and his wife is asking him for half of their stuff. It might be a good idea to sell his house so they can split the money.
You said we should sell our house when we have a major life event. I would love to start investing in real estate, but I dont have the funds right now. Maybe I will find a realtor who is currently investing to sell my house to.
I like how you mentioned that the best time to sell is before the market gets flooded. My sister is thinking of selling his house but she doesn’t know when is a good time to sell it. I’m going to share this information with her so that she can have an idea of when to sell her home.
Recently found your site and have been bingeing through your articles, first comment here. Really enjoying your write ups!
What are your thoughts regarding commercial real estate investment? I have recently been considering laying off the residential market and pursuing investment in commercial.
That’s a good idea that you can sell your investment property when you have a major life event. That would be useful so that you can pay for unexpected expenses. Then you could make sure you wouldn’t have to use some of your less expendable funds.
RE: selling and buying investment property in the same year to avoid capital gains tax. Does the actual calendar date of sale of the first property have to before date of purchase of second property? Our closing dates are such that we may have to purchase the new property a couple month before we can sell the old one ….
The best article and analysis I have ever read on when to pull the trigger and sell a rental property. Bookmarked this article for sure!!!
I found this article very interesting and useful. Thanks for sharing good knowledge and information.
We’ve been in REI for 40+ years & obviously have the majority of our wealth invested in a wide range of properties. There were a few years of negative cash flow & many long tedious hours of blood & sweat equity, but we survived. We did concentrate on paying down any financing so eventually everything we owned was free & clear & we have not had any debt for just as many years.
We can still buy properties up here in upstate NY that return 20-30% & we still do (short term) hard money financing for a select group of fellow investors @ 12-15%.
I certainly regret many of those we sold but it usually opened us up to more lucrative deals.
Over the years we were advised to load the proverbial IRA/401(k)’s etc for the tax deduction. But not having the foresight to chose AMZ, APPL etc it has never achieved the ongoing returns we have achieved with REI. Admittedly I was fortunate to be shown & appreciated the W-2 vs Passive Income tax consequences/advantages at an early age.
Several years ago my ‘consultant’ BIL got the ‘As seen on TV real estate bug’ & subjected us to an intensive 2 hour fact finding ‘interview’. He then informed us (complete with a written report) that we were doing it (REI) all wrong. Sadly last week he informed us that due to some bad investments (none are REI) he’ll need to work at least until he’s 70. (In fact many of my old “you’ll never make money in REI” colleagues are still waiting to afford full retirement).
I retired in ’98 (at 49) & all our kids own their own homes (that we either built or completely rehabbed & hold their notes) & they all have several investment properties & none of them have student loans. (My son did marry a student loan, but that was quickly dispensed of).
There were MANY times that sweat equity exhaustion clicked in & had it’s toll on our marriage, but we made it, can laugh about it NOW & we did it at an early age.
I think too many people miss another simple time to sell, which is, if the property has appreciated substantially resulting in your equity being substantially larger than your profits. This is similar to the argument made in the article of “when the cap rate is below the risk free rate of return”, but not exactly the same. For example, let’s say I initially purchase a house in an area with a great price to rent ratio for $60k ($12k down and $4k to close) and put in $14k for the rehab then the house earns me $6k per year in profit. That is 20% cash on cash return and $26k in equity in the house. It looks like a great deal and an investment you’d want to hold for a long time. However, if you get lucky and the property appreciates 10% per year over the next five years you then have roughly $80k in equity in the house. Assuming you can get 8% from the S&P 500 would you rather have $6k per year being a landlord or $6.4k per year investing passively in the S&P? I suppose you could argue that any place that has posted 10% annual increases in price would be worth staying in, or that the rents would likely have gone up as well, increasing your profits, and that’s probably true, but it doesn’t diminish my overall point which is that if you buy in a place that is initially has a high rent to price ratio but over time prices outpace rent you’re likely sitting on a lot of equity that may be worth reinvesting it in something else. Perhaps in other areas that still have high rent to price ratios, or perhaps in other investments. Of course you could refinance to pull the equity out, but that could dramatically reduce your cash flow on the house or cause it to go negative or expose you to interest rate risk.
Hello Maxwell, I don’t know if you’ll see this because it’s been a while since your comment, but just in case: We may be in this situation right now and I’m just wondering if you know an easy formula for figuring if it’s worth it to sell. I’m not financially savvy in all areas so a formulaic method to figure this would be helpful. We own 3 townhouses. One has likely increased from the $85K we paid for it to about $142K. That’s a no-brainer to sell. But two others we bought for $130K each and now would likely net us $152 each. How can I figure out if it’s worth it to sell?
Thanks for your advice, if you see this!
Marjorie
I had a question about which of the following scenarios is optimal in terms of finances earned and time spent to earn it…
I currently own a duplex that’s operating at a positive cash flow every month. Now, the lot is zoned for multiple units, meaning I can build extra units on this property (a total of 6). I’m just trying to better understand this from a conceptual framework, but would it be more advantageous for me to pay down the principal on this mortgage by making extra payments from my job as well as diverting the cash flow to the principal. That way, the sooner I can pay off the mortgage, the quicker I will get to ensuring that the rents that I’ll collect will purely be profit.
Or and this seems to be something I seem to see, hear, and read all the time…
Where individuals refinance their mortgages to access their equity to make a down payment for another property.
I guess the question I really have is why wouldn’t it make more sense to just pay down one property as quickly as possible so that you can say that whatever rents you get after paying down the entire principal will go directly into your pocket.
I feel like when I read these stories of people having a monthly cash flow of $40-$50,000, they own 40-50 properties that cash flow $1,000/year each and it seems like that takes a lot of time to perform this strategy versus the one I mentioned.
Am I missing something?
Super insightful article, thanks for putting the time in to crafting this. I’m early on in my path towards FI and still considering when/how to make RE investing part of the plan.
Definitely agree with your point in (3). This also applies to property in most of Australia I believe (my homeland!). Looking forward to fundamentals based pricing in that market for sure!
Some really helpful ideas here from other readers as well, in particular the VNQ. Keep up the great discussions all!
I’m meeting with my realtor to look into selling 3 of my rentals tomorrow. Prices seem unrealistically high to me so I may test the waters. I’d use the profits to pay off my personal home mortgage, I’d then get a line of credit so I could continue to invest, hopefully purchasing high value property. Every buyer needs to be a seller at some point! Thanks for sharing!
What is the gross annual rent you can get if you sell?
Thanks so much for this timely post, Sam. I find your articles helpful in general but this one really came at an important time. It is definitely helping tip the scales towards selling. And my plan is also to allign more towards passive income. The next 1.5 years are going to be building my future to the fullest!
I own a lot of rental property in the SF Bay Area and also Manhattan, its over 50% of my portfolio.
It’s been a blessing that I’ve had no problems with renters (only had 1 turnover and tenants take care of the houses like it were their own and they never plan on leaving)
I’m wondering whether to continue down this path (I’m addicted to acquiring and improving real estate) or just sell or 1031 exchange everythjng and lead a more simple life with my family, it’s a hard call.
Thank you for your article and giving me another option just than buy and hold forever.
This is a great post and one that I plan to keep bookmarked. Currently, have 3 rentals and can’t complain about returns. They are not even close to breaking #8 and personally don’t plan for that to be the case. The other one that hit home was change in family situation. We have baby #2 coming in October so things will change (for better) for sure.
The thing about some of the “best markets” on that list is that the population of some of those cities is rapidly declining… making for a terrible market situation over time… just by the basic laws of supply and demand. For example, Cleveland might have the highest cap rates, but it also has been losing population since the 1950’s. According to Wikipedia, the population of the City of Cleveland was 914,808 in 1950. In 2016 it was estimated to be just 398,265… LESS THAN HALF! If the inventory of homes is not decreasing but the population is, you can bet that vacancy rates are going to continue to rise. Find a market that is steadily growing but still offers good cap rates. I personally like Indianapolis :) Just something to pay attention to….
Owning forever can definitely cause some pains. Life changes. Markets change. Risk tolerance for 20 year old should be different from risk tolerance for a 40 year old.
I’ll be in the market for a tiny condo in the next 1-2 years. Won’t count as an asset for me. Plan is to keep it for 20. I’ll be in my 50s then and will likely desire a new type of living. May be the time I head to Indonesia for a spell.
Those are all great points. I am thinking about selling in about 1-2 years or renting my current primary residence out when we move, I have to run the numbers again but am leaning towards selling- one other thing is that if it’s an investment condo, there are costs of up keep to pay for, such as huge assessments. Condos don’t last forever unlike land. With a young child now I doubt I’ll have the time to deal with tenants in the future. My husband sold his condo as he also doesn’t like to deal with tenants and would prefer investing in the stock market. Hawaii would be awesome to live in- it’s one of my husband’s dream to live there, except its a bit difficult since we are Canadian and don’t have US citizenship.
I agree with #2, when other passive income generates more than your property investment its best to not deal with the headaches of home maintenance, paying property taxes, issues with the tenant and worrying about finding a potential tenant when the previous one moves out.
‘BURL = Own in Cleveland, rent in Maui. Even Lebron calls LA his home and plans to leave Cleveland next year.’ As a warrior fan myself since the late 80s, it doesn’t matter whether he stays in Cleveland or goes to LA, his team will not overtake the warriors as long as the core four stay intact.
Correct me if I am wrong, but when selling in order to qualify for the 500k tax free gain (married) you must be living in the property (primary residence) for 2 out of the last 5 years. Otherwise you’ll pay long term capital gains tax rates for anything over the cost basis.
Correct. Here’s a post with my details to account for different scenarios. https://www.financialsamurai.com/tax-free-profits-for-home-sale-250000-500000/
Honestly with how dismal the cap rates are in California I don’t understand why landlords wouldn’t just buy shares of Vanguards reit index VNQ. It has over a 4% dividend and requires no work.
That’s exactly what I’ve opted for. I have a decent % of my total portfolio allocated to RE (beyond my home which I own outright) and it’s 100% VNQ. I may play around with some Realty Shares with a sliver of this in my next quarterly investment/rebalancing.
Thanks for this post. I’ve been thinking about selling, but it’s not quite the right time yet. The gains outweigh the pain right now. Our tenants are great and that’s one huge piece of it. There are a ton of rentals coming and I have no idea how that will effect the rental rate. These new places are expensive so shouldn’t that raise the rental price?
Anyway, I’m planning to sell some properties in the next few years. I’ll keep this post bookmarked.
Good point on the expensive rentals perhaps raising rental prices. If the new expensive rental is close to your existing rental (within several blocks), and they all get soaked up, chances are that your rental may see an uptick in rent. But you’ve got to try and make the qualities somewhat similar with some upgrades, otherwise, there won’t be much price pull b/c these new rental renter at a higher price point are different than old rental renters.
It depends on how big your rental discount is and various factors.
Eventually, the supply of new rentals will overwhelm the market and cause prices to flatline or decline. This is largely what will happen more so than bringing your rental asking price up, assuming you aren’t too far away from market.
Hi
Happy new year.
Still not sure whether to sell my rental. I make 3% yearly – little work in keeping the apt as my supt takes care.”
However , I’m in my 70s now, and feel I can do better investing a 400 $ sale.
I will pay high taxes in nyc , as I do not plan to buy another property.
Is it time to sell now?
I have a mortgage on my apt that I am living i.
Should input it up for sale now? Don’t want to make a mistake .
Thanks so much!