12 Ways To Tell If You Should Sell Your Rental Property

You’re seeing real estate prices rise and rise and you’re wondering—should I sell my rental property?

A lot of investments are “buy and hold.”

If you bought your rental property for equity, you may be inclined to keep it forever.

But that’s not always realistic.

We’re going to discuss a few of the reasons that you might be better served by selling your rental property.

The Top 12 Indications You Should Sell Your Rental Property

Warren Buffett always says to “buy and hold,” but he’s talking about stocks. Though it’s rare, there are definitely times when the smartest thing to do is sell your rental property.

But selling rental property also isn’t something that should be taken lightly. Not only are you going to miss out on all that future equity, but you’ll have to deal with things like capital gains tax.

Here are some of the major reasons you might want to cut your real estate investing short.

1. You’ve Realized That You’re Not Cut Out to Be a Landlord

You have a tenant six months behind on rent, but you won’t evict them. You’re a sensitive person, but you might not be a good landlord. Being a landlord means being a business owner. And that means that you may have to do some difficult things to ensure your rental income.

It may be that you are too soft-hearted to be a landlord (there’s nothing to be ashamed of). It may be that you just hate doing regular maintenance or answering calls about the property. Being a landlord is a lifestyle.

Now, that doesn’t mean that you have to sell your property. You could hire a property manager and stop having to micromanage your real estate investment. But that brings us to the next point…

2. It’s Not Worth It to Hire a Property Management Company

If you have a single residential property that doesn’t bring in a lot of income, then it may not be worth it to hire a property management company. Once the company takes its share of your profits, you may be left with nothing.

So, if you don’t want to have to manage your residential rental property and you can’t reasonably hire a property management company, the easiest and cleanest thing to do might be to sell.

3. You Think You Have More to Gain By Selling the Property

If it’s a seller’s market and you see change on the horizon, it may be time to get out with the money that you’ve made.

If you’re a real estate agent, you have a deep understanding of your market and you can see when the tide is going to turn. There are always upswings and downswings.

Some investors would prefer to court a potential buyer before they hit that downswing; then they can just reinvest on the upswing. Market crashes can last the better part of a decade, so if you sense that the market’s going to go down, you might want to go out.

Generally, when housing prices go down, rental prices go down too—so it might not be worth it to hold on to the property

4. Your Cash Flow Has Been Going Down Rather Than Up

Some areas go into decline. You could have purchased a property in an area that’s losing its people. There’s little you can do about that.

When rent rates go down, they can leave you underwater as far as your mortgage payment and mortgage interest go. You could find yourself paying mortgage interest, insurance, and property tax on a property that’s rapidly depreciating in value.

The answer, in this scenario, is usually to sell. If you’ve had the property for a while you shouldn’t have to pay short-term capital gains tax. In fact, if you think that you have a bead on a better market, you could do a 1031 Exchange and just exchange one rental property for another.

5. You Have Better Investment Opportunities Elsewhere

Being a rental property owner is lucrative. But let’s say that you know about an even better opportunity for investing your money. You’re currently making 10% a year on your money… but you have the potential to make 20% or even 25%.

If you have better investment opportunities, then it makes sense to take the cash and run. But consider that you aren’t going to get the full value of the property. You’ll have taxable income, need to pay closing costs, and may need to make some repairs to the property before it even sells.

Still, it’s possible that even considering those expenses, you can make a better cash return elsewhere.

6. Your Life Situation Is Changing

Investments are there to build our capital so that we can live our lives. It may be that you’re having another child, that you’re quitting your job, that you’re retiring, moving to another country—things happen.

When your life situation changes dramatically, being a rental property owner can feel like a burden. It may be that you’re better off selling rather than trying to manage the property while more complex things are going on in your life.

Remember, we become real estate investors so we can live, not the other way around!

Still, just as with the other scenarios, think it through. It’s possible that you can still make more money by taking out an equity loan against the property (when interest rates are low) and continue to enjoy capital growth. It all depends on your personal and financial goals.

7. You Can’t Afford the Maintenance Costs

Some properties just end up being duds.

You could have a good tenant and be bringing in a decent income, but there are just too many repairs. Maybe the roof, foundation, and HVAC system all went out at once.

You should never be afraid to cut your losses. Remember: the worst thing you can experience in real estate is sunk cost fallacy.

There will always be times when a property just isn’t worth the time. And when that happens, you may be better off selling.

8. You Don’t Have a Properly Diversified Portfolio

A lot of real estate investors start out with a single property and then build their portfolio.

But it’s also possible that you have a single property and no intent to get further into the market.

When you only have a single piece of real estate, you’re actually very vulnerable. Let’s say you have an expensive home you used as a residence; it’s $300,000 and it now rents for $1,750.

If someone stops paying the rent, you’re significantly in the red.

Ask yourself: If my existing tenant stops paying for six months, can I keep paying the mortgage? If the answer is “no,” then the risk might not be worth the capital gain.

9. You’re Moving Away from the Property

Moving away from a property is one of the most common reasons to sell.

It’s rarely a good idea to be a distant landlord. Even if you have someone managing your real estate for you, issues will crop up.

You can exchange one property for another with a 1031 Exchange to avoid capital gains tax; you don’t post any capital gains, you just exchange a like-kind property with another like-kind property.

If you have no particular attachment to your rental property, it may be better to just do an exchange. You preserve your cash flow and your equity, but you’re no longer managing a property that’s far away.

10. Your Property Has Significantly Aged

Some properties do come with an expiration date.

If you have an 80-year-old property that’s increasingly falling apart, it only makes sense that you should try to sell it rather than preserve your current cash flow.

An investment property that’s quickly depreciating isn’t going to be an investment property for long.

Of course, there are many renters who would love a historic mansion, and there’s many an investor who made their money on historical properties.

But not everyone is up for the challenge of managing an old home. Not only does it come with a potentially depreciating value, but it comes with additional repair costs (and additional repair calls) every year.

11. You Have a Big Expense Coming Up

As an investor, you understand that many of your assets are also there to provide potential liquidity. While the liquidity of real estate isn’t high, it’s actually one of the best investments because it can move so fast. In the right market, you never really have to wait to sell a house.

Let’s say you have a big expense coming up such as buying a larger primary residence. It makes sense to just sell your rental property and fold it into real estate that you can use directly (and that you get more tax breaks on).

Other big expenses could include medical debts, sending a kid to college, or starting a business.

Now, there’s something to consider: You can usually get a line of credit on equity. While it’s not always a great idea to get additional debt, a HELOC can preserve your equity.

If you’re in a fast-growing market, the equity you gain by keeping the property could actually wash out any interest you pay on the HELOC, and you get to keep the property in use as well.

So, it’s not always the best idea to dissolve an asset because you need extra money. But it can be if the asset isn’t making you a lot of money to begin with.

12. You’re In Debt

Finally, another major reason you might sell your rental property is that you’re currently in debt.

If you’re going through a divorce, going through bankruptcy, or just need to pay off a significant amount of credit card debt, selling a rental property could be the best answer.

Realistically, if you need to go through a personal foreclosure or bankruptcy, the rental property is likely to be in danger regardless.

But it’s worth it to talk to a financial expert before you make any decisions regarding your rental. Selling your rental property means getting rid of an investment and a money generator.

If you can get rid of your debt by restructuring it into small, monthly payments, it’s possible your rental property could help you pay off that debt without having to sell the property completely.

Should I Sell My Rental Property?

You still have a question unanswered: Should I sell my rental property? Well, it depends.

A rental property is a great investment. Not only are you making passive income, but you’re also building equity. But there are times when you may not be making as much in rent as you should.

It’s worth it to consider whether taking a loan against your equity or engaging with a property management company could help.

But for most people, there will come a time when selling rental property does make sense.

If you’re continually spending money on your investment property and just want to walk away with cash—it may be time.

Rental property investment isn’t for everyone and there are other ways to become a real estate investor.

FAQs

Is it difficult to sell a rental property?

It shouldn’t be. If it’s difficult to sell your rental property, then you’re probably in a buyer’s market—and that’s exactly when you don’t want to sell. Consider some alternatives before you start dropping your price.

How long should you keep an investment property?

This depends on your personal investment goals. Generally, you should keep an investment until a better investment comes along, until it stops bringing in cash, or until you need the money.

Are rental properties a good investment now?

Historically, rental properties have always been one of the best investments. But this is highly local. Whether rental properties are the best investment for you really depends on the location you’re in and the properties you’re looking at.