Owning a rental property can be a significant boost to your personal finances. When done right, owning a rental property allows an individual to benefit from a regular cash stream, enjoy tax breaks, build equity, and hold more rental properties.
However, owning a rental property is not without its significant challenges: After all, a rental property requires regular maintenance, marketing, and potentially dealing with troublesome tenants. At some point in your personal life, you may find that this stable source of passive income is no longer worth the trouble, and you may find that you no longer want to be engaged in rental property ownership.
Of course, not everyone is the same, and different personal and financial concerns may govern your management of any investment property. As such, you need to determine when to sell the rental property.
Financial Considerations To Sell Your Rental Property
Sometimes, it is worth it to sell your rental property simply because financial considerations may force your hand.
For a Financial Goal
In some instances, you may need the money. As you know, a rental property can be a precious income-producing asset that can appreciate very significantly over time. The real estate market may hit a point where the price of your rental property rises significantly, and you want to cash in on your appreciating asset.
Potential Price Drops
If the government loosens the zoning restrictions, multifamily properties can spring up, reducing existing houses’ prices.
California now permits ADUs to be built on single-family house plots or lots to be split, effectively doubling the number of homes.
Fearing a drop at a future time, you may decide to sell your rental property and take advantage of the high real estate prices of the moment. Timing the market this way can be very challenging, and you will want to ensure you do your homework.
Lower Cash Flow
Alternatively, rental prices may no longer be enough to sustain your investment. A rental property can only be as valuable as the local market can bear. To that end, you can only generate passive rental income if you can collect enough rent to manage your expenses.
What are the rents in your area at a particular moment? Are market rents moving up or down, and is that still enabling you to attract trouble-free tenants to your property?
How is the economy performing for large local employers, specifically in your area?
If property taxes are too high or insurance rates spike, it may be time to sell your rental Property. California has Prop 13, which ensures property tax increases are capped at 2% annually, unlike Texas, which is based on market value.
Similarly, many insurers have exited Florida, and insurance rates in the state have spiked higher, reducing the rental cash flow.
Anticipated Higher Costs
Maintenance concerns can also be critical when considering the specific timing of when to sell a rental property. As you unquestionably know, owning rental property is a costly proposition. Owning an investment property means you constantly have to reinvest the profits from that property into the home.
Sometimes, maintenance costs may be relatively routine.
Other times, you may need to invest a significant portion of your rental income – and then some – into making major repairs. When a central HVAC system breaks or you need a new roof, you may decide that it is no longer profitable to maintain this investment property.
Even if you can make the mortgage payments, does it make the most financial sense to make the necessary repairs and continue holding onto the property?
Another challenge of being a rental property owner is dealing with tenants, tenant turnover, and finding new tenants. Generally speaking, a rental property owner should consider longer-term contracts.
However, your local market may not support these contracts, and you may find yourself in a position where you must constantly work with a real estate agent to screen and find potential buyers. This process is time and labor-intensive, and it’s exhausting.
Eventually, you may decide it is no longer worth the stress or strain.
Unexpected Price Appreciation
Finally, there are also personal timing considerations to keep in mind. Local market trends may mean that there are moments during the year when your property is hot and more likely to turn a profit for you.
In these instances, this is the right moment to make a sale. Such a timing consideration can be dramatically enhanced if you find yourself receiving a particularly lucrative offer and it is a seller’s market.
In that case – particularly if you have a home in a hot tourist destination – property prices and rental demand may increase the offer size to a price where selling a rental property is optimal.
Maybe the rental Property was in a great neighborhood when you bought it, but now crime has spread to your area.
A large employer may relocate, or the advent of remote work could reduce demand for the rental market.
Demographic trends could indicate you are now in one of the states losing population.
What other local market factors may be impacting your specific timing decisions? Are there things happening in your area – like improvements to the school district or the development of new housing options – that may positively or negatively impact housing?
Better Investment Options
After a few years as an investor and learning from real estate investment groups, you may want to own a successful real estate empire.
Or you could get better gains with distressed real estate investing.
It is always prudent to evaluate rental properties to determine if you maximize the return on investment (ROI). The cap rate may be lower now, and you have better opportunities elsewhere. Or the tax benefits such as depreciation and mortgage interest are no longer available.
Asset diversification is crucial whether you are investing in the stock market or real estate.
Consider diversifying your holdings.
If your investments are heavily concentrated in real estate, a housing market collapse could jeopardize your financial well-being. It may be worth contemplating the sale of a rental property and diversifying your investment portfolio to encompass alternative investments and assets.
However, when they find a great job in another state, the question arises if it is worth keeping the rental and being a remote landlord. Sometimes, long-distance real estate investing might not work, and selling might be a better option.
You won’t have to pay any capital gains tax on a profit of $250,000 as a single tax filer, and the capital gains tax exemption increases to $500,000 if you are married. This exemption can be highly beneficial to individuals who are selling lower-value homes.
The actual capital gains tax rate varies based on your income, so keep that in mind when calculating your taxes. Furthermore, remember that you can only apply for the owner-occupied exemption every two years.
Finally, it is always essential to remember tax considerations when deciding when to sell your property. The actual amount of taxes you pay will vary based on locality, state, and home price.
Let’s start at the local level. First, some municipalities have a real estate transfer tax. This may chop a small portion – usually no more than a few percentage points – out of the net of any profit you make on selling your rental property.
At the state level, different states have different tax rates. Some states may have some capital gains tax. Other states will make you pay the personal income tax on any gains, and other states may have other specific real estate transfer taxes.
Remember that you may have to pay a capital gains tax at the federal level. The actual capital gains tax rate varies based on your income, so keep that in mind when calculating your taxes.
These taxes have the practical effect of taking smaller bites out of your accounting. You’ll have to watch how many taxes you pay to ensure you don’t ultimately have negative cash flow from a sale.
Furthermore, while taxes must be a factor in sale timing, the reverse is also true in that there are certain taxes (like the property tax) that you won’t have to pay once you complete a sale. When considering the impact of capital gains taxes, consider those taxes from multiple perspectives.
A mansion tax imposed in LA led to a spurt of sales for properties valued above $10 million. Of course, that impacts only people wanting to be billionaires, but something to always keep in mind.
Personal Considerations To Sell Your Rental Property
You can consider every financial decision in the world and have that influence your decision. Still, the choice to exit the housing market often comes down to personal considerations before it comes down to anything else. After all, what is the point of relying on investment properties to generate extra income if you cannot use the proceeds properly?
Consider the immense personal workload that goes into managing an investment property. You must market the property, supervise its upkeep, screen tenants, pay taxes, and more.
Even if you want to move away from being a landlord and decide to hire a property manager, you still need to approve the decisions.
None of this is a minor commitment, and even in the best circumstances, you will have to invest a solid amount of time in managing any investment opportunities. Indeed, contrary to popular belief, there is nothing “passive” about running investment properties, even if the IRS says it is.
Of course, you could use the best property management software, but it might be a chore.
First-time landlords are often worried about the tenant screening and management process. RentRedi is landlord-tenant software that makes it easy for landlords to manage their properties. RentRedi enables landlords to list properties, screen tenants with TransUnion-certified background checks, receive mobile-submitted rent, and manage maintenance requests.
Major Life Events
These considerations may be enhanced by anything happening in your life. You may have a significant life event – such as marriage, childbirth, a death in your family, or more – that may demand your attention and require you to divest yourself of anything that will distract you from dealing with these life events.
In some cases, you may need an immediate infusion of cash – and the only sustainable way of bringing in this money may be by selling your investment property so that you only maintain your primary residence.
Sometimes, individuals find themselves inheriting rental property they wish to avoid handling. If there is no interest in owning an investment property, selling may be a sensible option.
You avoid capital gains tax since inheritance provides a stepped-up basis to the property appreciation value. The sale proceeds will increase your average net worth without impacting your taxable income.
Changing Government Rules
One significant real estate investing risk that was never a concern before is government interference.
Rent control is one example where the assumption is that landlords should take on the responsibilities of the government. Policies geared towards imposing rent control could be a good reason to sell.
The eviction moratorium is another example of government overreach and changing market conditions. For example, San Francisco is still having an eviction moratorium. Can you survive without rent for three years? Not to mention the damage these tenants would cause when you can finally evict them.
Yes, you might be in one of the best states for real estate investors and currently do not have these policies. But a national emergency declaration or Presidential Executive Order could change that anytime.
Is Now a Good Time To Sell My Rental Property?
There is no question that ownership of a rental property comes with many benefits, including:
- When properties are occupied, you can generate passive income. You can then use this passive income to maintain the asset, invest in other financial opportunities, or buy another residential rental property. You can even retire early by investing in real estate.
- Owning a real estate asset like a residential or commercial property is highly likely to appreciate over time, giving you future property value growth opportunities and a perfect inflation hedge. This can help you make money when you sell your rental Property.
- Owning a property comes with many real estate tax benefits. You can also write off certain expenses associated with operating a rental property, thus allowing you to keep your business expenses to a minimum.
However, there are also significant challenges. These include:
- Even the best property and best tenant require regular communication. Real estate investing is never genuinely passive income, as you must maintain your property and ensure that your tenants appropriately care for the property.
- Any money you earn in rental income may be offset by maintenance, marketing, and legal costs. You will also have to manage paying utilities and property taxes and keeping an eye on the real estate market.
- While there are benefits to scaling properties, even owning one rental property means you will have to deal with extensive complications.
This returns to the fundamental question: When is the right time to sell your rental property?
As you now understand, there’s no set answer here, and real estate investing works differently for different people.
The right time for you may be the wrong time for someone else, and a factor that matters deeply to you may not even impact another person.
This is a financial decision, of course, but it is also personal. As such, you’ll have to figure out which of the above factors matter for you – then make the decision that matters most to you and your family.
Exit Strategy For Selling Your Rental Property
Consider selling your rental property because you no longer feel you have the time or energy to manage this real estate investment.
What will you do with the money when it’s time to sell? Putting together a plan ahead can help avoid unnecessary stress and uncertainty.
Depending on your reasons for selling, here are some standard solutions.
Consider working with a property management company if time and effort are the reason for selling. A good property manager will do all the work for you: They will maintain the property, screen tenants, manage emergencies, and more.
Of course, these services don’t come for free, and a property manager will take a large chunk off the top of any profits you may make on your rental property. Furthermore, different property managers operate differently.
As such, you may still have to engage in some aspects of managing your property. Thus, this alternative may fail to meet the mark and put you in a situation where you may still find it worth considering selling your rental property.
Investing in turnkey property is another option to consider passive earnings. A turnkey property can be a house, duplex, or apartment refurbished and wholly renovated before being sold to a real estate investor.
They are available for tenants immediately, and some already have tenants, which means an investor starts to collect passive income instantly.
Roofstock is an online marketplace for tenant-occupied single-family homes—many are pre-inspected, come with a tenant in place, and generate cash flow. Some even offer vacancy protection or a 30-day money-back guarantee.
Crowdfunded Real Estate
Real estate crowdfunding allows several investors to pool their money together and buy a real estate investment property with the contributed pool.
Crowdfunding for real estate investors is a way to diversify their investments and own multiple properties with less risk than if they were doing it alone. The process gives individual investors access to the real estate market without owning, financing, or managing properties.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investors. The minimum investment is $5,000.
Hard Money Lending
You can deploy the proceeds of your rental property sale into hard money lending.
As a private investor, you provide a loan at rates higher than a traditional lender based on the property’s value. Hard money loans are a form of real estate note investing but with terms of a few years or less.
Since hard money lending is taxed at a higher rate, consider investing with a self-directed real estate IRA.
Whatever your goals, having a clear plan can help guide your decisions and ensure you make the most of your investment.
There’s a lot to consider when deciding to sell, such as assessing the current rental market, evaluating your property, considering your financial goals, calculating any tax implications, having an exit strategy, and not rushing the decision.
All these steps will help ensure you make the best decision for yourself and your investment.
Suppose you thoughtfully work through all the considerations before making a final decision on whether or not to sell your rental property. In that case, you can rest assured knowing you made the right choice for your financial future.
When To Sell Rental Property FAQs
Here are a few frequently asked questions regarding the optimal timing for selling a rental property.
When Is the Best Time To List a Rental Property?
When to sell a rental property depends on market conditions, property conditions, and investment goals. Timing the sale to align with market conditions may be challenging, but as per data from Realtor.com, the week of April 16-22 is the best time to sell.
How Long Should You Hold an Investment Property?
Typically, it is advisable to wait at least one year before selling a property. Selling it within a year would subject you to higher short-term capital gains taxes. The decision to hold the investment property beyond a year largely depends on personal preference.
Is It Better To Sell a Paid-Off House or Use It as a Rental?
Selling your home may be preferable if you require funds for your next home, have no desire to be a landlord, or anticipate a significant profit. On the other hand, renting it out could be a more suitable choice if your move is temporary, if you seek rental income, or if you anticipate an increase in home values in your area.
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
M1 Finance: John compared M1 Finance against Vanguard, Schwab, Fidelity, Wealthfront and Betterment to find the perfect investment platform. He uses it due to zero fees, very low minimums, automated investment with automatic rebalancing. The pre-built asset allocations and fractional shares helps one get started right away.
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investor. Minimum investment is $5,000.
Platforms like Yieldstreet provide investment options in art, legal, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.