Long-term real estate investing is a great way for individuals to gain recurring cash flow and a passive income. But when is the ideal time to rent vs. sell your investment property?
Rent vs. Sell: When Should I Sell My Investment Property?
The timing of the real estate market isn’t the only thing investors need to consider when deciding whether to rent vs. sell. In truth, finding the “right time” to sell can be complicated and depends on both the market and an individual’s unique goals and circumstances.
While pinpointing the perfect time to sell can be tricky, several technical and personal factors can help identify the time to move on from a long-term investment.
Let’s look at the 5 technical and personal identifiers that can signal when to sell an investment property:
While pinpointing the perfect time to sell can be tricky, several technical and personal factors can help identify the time to move on from a long-term investment.
Let’s look at the 5 technical and personal identifiers that can signal when to sell an investment property:
1. A Declining Cap Rate on Your Investment Property
The capitalization rate (cap rate) is the closest measurement we have to a rent vs. sell calculator. This metric identifies the rate of return on a long-term investment property (i.e., how much money the property is making you annually). Investors can use the cap rate formula early on to estimate the profitability of a property before purchase, or as an annual measurement to monitor the growth or decline of a property’s profitability.
Cap rate = Net Operating Income (NOI) / Current Market Value x 100
A declining cap rate means a lower net operating income (NOI)–and the time to sell vs. rent your property. The NOI is the amount of money a property brings in after expenses. A property’s expenses can include taxes, insurance, repairs, vacancy times, and property management expenses.
For example, let’s say you purchase a single-family home for $300,000. When deciding whether to rent vs. sell the property, you measure the property’s potential cap rate by researching rental prices for similar properties in the area. Perhaps you find that you can rent the property for $3,500 a month. You decide to manage the property to save money, reducing operating costs to $1,000 a month–giving you a $2,500 monthly or $30,000 annual NOI. The cap rate on the property ($30,000 / $300,000 x 100) is 10% your first year.
However, let’s say you expand your portfolio and, to simplify business operations, you hire a property management team for $10,000 in annual costs. This increase in net operating costs would drop your cap rate to under 7%. On the contrary, the property’s market value could skyrocket due to a growing local job market. While a positive, it also lowers the property’s cap rate and can indicate the time for selling an investment property.
For example, let’s say you purchase a single-family home for $300,000. When deciding whether to rent vs. sell the property, you measure the property’s potential cap rate by researching rental prices for similar properties in the area. Perhaps you find that you can rent the property for $3,500 a month. You decide to manage the property to save money, reducing operating costs to $1,000 a month–giving you a $2,500 monthly or $30,000 annual NOI. The cap rate on the property ($30,000 / $300,000 x 100) is 10% your first year.
However, let’s say you expand your portfolio and, to simplify business operations, you hire a property management team for $10,000 in annual costs. This increase in net operating costs would drop your cap rate to under 7%. On the contrary, the property’s market value could skyrocket due to a growing local job market. While a positive, it also lowers the property’s cap rate and can indicate the time for selling an investment property.
2. The Need for Costly Repairs
The decision to rent or sell an investment property is obvious when an investment’s positive cash flow turns negative. Costly repairs are among the most common ways a rental property’s cash flow can turn negative.
While some repairs and renovations can increase property appeal and attract renters at higher prices, constant repairs can scare off tenants, leave you vulnerable to vacancies, and stick you with hefty bills. For recurring or larger repairs, like a new septic system or structural repairs to the property, it’s important to weigh the overall costs of the repair to your NOI and cap rate. If your cash flow goes from green to red, it may be time to sell vs. rent.
While some repairs and renovations can increase property appeal and attract renters at higher prices, constant repairs can scare off tenants, leave you vulnerable to vacancies, and stick you with hefty bills. For recurring or larger repairs, like a new septic system or structural repairs to the property, it’s important to weigh the overall costs of the repair to your NOI and cap rate. If your cash flow goes from green to red, it may be time to sell vs. rent.
3. A Shift in Market Conditions
Not all reasons to sell your long-term investment have to be negative. As mentioned, market conditions can skyrocket your property’s value. While you lose a recurring passive income stream, the significant profit from selling may be too big to ignore and can bankroll future long-term investment opportunities.
Factors that can affect market conditions and increase the value of your property include:
Factors that can affect market conditions and increase the value of your property include:
- Low housing supplies with high market demand
- Dropping interest rates
- Favorable government or institutional programs for buyers or sellers
- Positive local or national economic indicators, for example, the arrival of a large corporation adding many new jobs in your area
4. A Growing Investment Portfolio
Sometimes the decision to sell or keep a rental property depends on your business goals. Let’s say you bought a property at a great price, found reliable tenants, and made a sizeable profit over the last few years. While passive income and peace of mind may be an end goal for some, others may view the additional cash and overall success of the property as a sign that it’s ready to take the next step.
For investors looking to expand their portfolio and dive into new opportunities, selling your rental property for a substantial profit after a few years will give you the freedom and liquidity to move on to the next bigger and better investment project.
For investors looking to expand their portfolio and dive into new opportunities, selling your rental property for a substantial profit after a few years will give you the freedom and liquidity to move on to the next bigger and better investment project.
5. A Major Life Event
While real estate investing is a great way to create passive income and find financial freedom, life doesn’t always follow your business plan. Key life events, like a new child, a death in the family, a lost job or job relocation, or a severe accident, require a re-evaluation of owning your investment.
Sometimes, the right decision to rent vs. sell depends on where your time and money are needed most. If you don’t have the time to manage a property, it could be time to hire a property manager or sell the property and consider more passive investment opportunities in the immediate future.
Sometimes, the right decision to rent vs. sell depends on where your time and money are needed most. If you don’t have the time to manage a property, it could be time to hire a property manager or sell the property and consider more passive investment opportunities in the immediate future.
Finding the Right Investment Capital Partner
While choosing the right time to rent vs. sell a long-term investment property can be challenging, it’s easier with the right capital team by your side. CIVIC’s team of industry experts are up-to-date on fluctuating market conditions, real estate trends, and the latest investment opportunities. We have the tools, knowledge, and capital to simplify purchasing, renovating, and selling a long-term rental property.
Whether you’re looking to buy an investment property with a rental loan or you’re expanding your investment portfolio, let CIVIC’s industry professionals help you make the most of your investment. Schedule a FREE consultation today by CLICKING HERE.
Whether you’re looking to buy an investment property with a rental loan or you’re expanding your investment portfolio, let CIVIC’s industry professionals help you make the most of your investment. Schedule a FREE consultation today by CLICKING HERE.
