Are you pondering the right time to sell your investment property? If you’re unsure, you’re in the right place. Having managed investment properties since 2003 and currently juggling multiple rentals while settling into a new forever home, I’ve gained a fair share of insights into this topic.
The ideal scenario for real estate investment is to never sell. By holding onto your properties, you can benefit from the continuous wave of inflation which tends to push up rents and property values. Since the onset of the pandemic, inflation has hovered around 3.3% after peaking at 9% in mid-2022, which is impressive.
Moreover, by keeping your real estate, you avoid paying high selling commissions, which can be quite burdensome. However, there may be good reasons to let go of your property despite these benefits.
When is the Right Time to Sell?
After witnessing a significant increase in property values, I’ve noticed more people considering selling their properties. For your primary residence, it’s generally best to hold onto it as long as possible. But for investment properties, there are several reasons why selling might be the better option:
1. Major Life Changes:
Life events such as welcoming a new family member, experiencing a death, or facing a significant health crisis can shift your priorities and financial needs. These events might necessitate more of your time or resources, making the management of rental properties less feasible.
2. Alternative Sources of Passive Income:
If you’ve developed other sources of passive income that are less demanding or more lucrative, such as dividends or royalties, it might make sense to move your investment from real estate to these avenues.
3. Low Cap Rate Compared to Risk-Free Rate:
If your property’s cap rate falls below the risk-free rate, say the yield on a 10-year Treasury bond, selling could be a wise financial move. For instance, my property’s net operating income gives a cap rate that is significantly lower on its current market value than on its purchase price.
Changing Market Dynamics
Areas like San Francisco and New York have traditionally low cap rates, which is a trend likely to spread to secondary cities as well, thanks to technological advances and changing work patterns. The cap rates in these areas might compress further, making real estate less attractive relative to other investment opportunities.
Strategic Property Management
As we age, our desire to manage the hassles of property management decreases. This shift in priorities is why many turn to real estate investment trusts (REITs) or other passive real estate investments like crowdfunding platforms, which provide a hands-off approach to real estate investment.
Considerations for Future Planning
If you’re considering selling, it’s also wise to think about strategic reinvestments. For example, utilizing a 1031 exchange can defer capital gains taxes by rolling your investment into a new property. This strategy can be particularly effective if you’re looking to transition from active to more passive real estate investments.
In summary, while holding onto real estate long-term has its benefits, various factors such as personal circumstances, market conditions, and alternative investment opportunities can influence the decision to sell. Balancing these can help you decide the right time to let go of your investment property, simplifying your life and potentially improving your financial returns.
